<PAGE>
DRESDNER RCM GLOBAL FUNDS, INC.
SUPPLEMENT DATED OCTOBER 30, 2000
TO THE STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 2000
THE FOLLOWING INFORMATION REPLACES ALL SIMILAR REFERENCES THROUGHOUT THE SAI:
Upon approval of the reorganizations by shareholders and satisfaction of
normal closing conditions, the Dresdner RCM International Growth Equity Fund
will be reorganized from a series of the Dresdner RCM Capital Funds, Inc.
(the "Capital Company") to a series of the Dresdner RCM Global Funds, Inc.
(the "Global Company") and the Dresdner RCM Europe Fund will be reorganized
from a series of the Dresdner RCM Investment Funds Inc. (the "Investment
Company") to a series of the Global Company. As a result of the
reorganizations, the Capital Company and the Investment Company will be
dissolved as Maryland corporations.
THE FOLLOWING INFORMATION REPLACES THE SIMILAR INFORMATION FOUND IN THE
SECTION ENTITLED "SHORT SALES" BEGINNING ON PAGE 8 OF THE SAI.
After the reorganization, the International Fund may engage in short sales
transactions. Please refer to pages 8-9 of the SAI for further details on
these transactions and their associated risks.
THE FOLLOWING INFORMATION REPLACES THE SIMILAR INFORMATION FOUND IN THE SECTION
ENTITLED "DELAYED-DELIVERY TRANSACTIONS" BEGINNING ON PAGE 9 OF THE SAI.
After the reorganization, the Europe Fund may purchase securities on a
delayed delivery or "when issued" basis and may enter into firm commitment
agreements. Please refer to page 9 of the SAI for further details on these
transactions and their associated risks described on page 25 of the SAI.
THE FOLLOWING INFORMATION REPLACES THE SIMILAR INFORMATION FOUND IN THE SECTION
ENTITLED "FUTURES TRANSACTIONS" BEGINNING ON PAGE 10 OF THE SAI.
After the reorganization, the Europe Fund may enter into futures contracts
for the purchase or sale of fixed-income securities, foreign currencies or
contracts based on financial indices, including indices of U.S. government
securities, foreign government securities, equity securities or fixed-income
securities. Please refer to page 10 of the SAI for further details on these
transactions and their associated risks described on pages 26 and 27 of the
SAI.
THE FOLLOWING INFORMATION REPLACES THE SIMILAR INFORMATION FOUND IN THE SECTION
ENTITLED "DEBT SECURITIES" BEGINNING ON PAGE 13 OF THE SAI.
The Large Cap Fund, Tax Managed Growth Fund, Biotechnology Fund, Global Small
Cap Fund, Global Technology Fund, Global Health Care Fund and Europe Fund
(after the reorganization) may each invest up to 20% its total assets in
short-term debt obligations. The Emerging Markets Fund may invest up to 20%
of its assets in emerging market debt securities. Please refer to page 13 of
the SAI for a description of these securities and their associated risks
described on page 24 and 25 of the SAI.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION FOUND IN THE SECTION
ENTITLED "FUNDAMENTAL POLICIES" BEGINNING ON PAGE 28 OF THE SAI.
After the reorganization, the fundamental policies previously applicable
to the Europe Fund beginning on page 29 of the SAI will be eliminated. The
Europe Fund will be subject to fundamental restrictions 1-14 beginning on page
28 of the SAI.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION FOUND IN THE SECTION
ENTITLED "OPERATING POLICIES" BEGINNING AT PAGE 30 OF THE SAI.
After the reorganizations, the Funds will be subject to the following
operating policies that provide that a Fund may not:
1. Participate on a joint or a joint-and-several basis in any trading
account in securities (the aggregation of orders for the sale or
purchase of marketable portfolio securities with other accounts under
the management of the Investment Manager to save brokerage costs, or to
average prices among them, is not deemed to result in a securities
trading account).
2. Invest more than 15% of the value of its net assets in securities
that are illiquid (this restriction applies only to the Balanced
Fund; the other Funds are subject to a similar fundamental policy).
<PAGE>
THE FOLLOWING INFORMATION REPLACES THE SIMILAR INFORMATION FOUND IN THE SECTION
ENTITLED "DIRECTORS AND OFFICERS" BEGINNING AT PAGE 34 OF THE SAI.
Upon approval of the shareholders at a meeting scheduled to be held on
December 18, 2000, the members constituting the Board of Directors of the
Global Company will be DeWitt F. Bowman, Pamela A. Farr, George B. James,
John A. Kriewall, George G.C. Parker and Kenneth E. Scott. Upon approval of
the shareholders at a meeting to be held on December 18, 2000 for
reorganization of the Europe Fund, the Board of Directors will be expanded to
include Robert J. Birnbaum, Theodore J. Coburn and Alfred W. Fiore. The
officers of the Global Company are Anthony Ain, Robert J. Goldstein, Karin L.
Brotman, Jennie W. Klein and Steven L. Wong. For professional biographical
information on these individuals, please refer to the SAI.
Each Director of the Global Company receives a fee of $1,000 per year plus
$500 for each Board meeting attended and $250 for each Audit Committee
meeting attended. The current members of the Global Company's Audit Committee
are DeWitt F. Bowman and George B. James. Each Director is reimbursed for
travel and other expenses in connection with attending Board meetings.
THE FOLLOWING INFORMATION REPLACES THE SIMILAR INFORMATION FOUND IN THE SECTION
ENTITLED "CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES" BEGINNING AT PAGE
39 OF THE SAI.
As of August 9, 2000, there were 17,670,584 shares of the International Growth
Equity Fund outstanding, 11,747,911 shares of the Global Technology Fund
outstanding, 1,871,110 shares of the Global Small Cap Fund outstanding,
4,811,695 shares of the Global Health Care Fund outstanding, 1,930,445 shares of
the Large Cap Growth Fund outstanding, 16,016,991 shares of the Biotechnology
Fund outstanding, 577,448 shares of the Emerging Markets Fund outstanding,
2,223,071 shares of the Tax Managed Growth Fund outstanding, 1,593,026 shares of
the Balanced Fund outstanding and 4,938,916 shares of the Europe Fund
outstanding. On that date the following were known to the Company to own of
record more than 5% of the Funds' outstanding capital stock:
<TABLE>
<CAPTION>
Name and Address of % of Shares
Beneficial Owner Shares Held Outstanding
<S> <C> <C>
LARGE CAP GROWTH FUND
Pacific Maritime Association 428,300 22.18%
P.O. Box 7861
San Francisco, California 94120-786
Jomei Chang & Dale Skeen Trustees 341,131 17.67%
Congoleum Corp Master Trust 280,445 14.52%
3705 Quakerbridge Road
Mercerville, New Jersey 08619-0127
AAA Washington 185,335 9.60%
1745 114th Avenue SE
Bellevue, Washington 98004-6968
Charles Schwab & Co., Inc. 158,773 9.33%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
TAX MANAGED GROWTH FUND
Boston & Company 1,757,833 79.28%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
<PAGE>
Charles Schwab & Co., Inc. 117,383 5.28%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
BIOTECHNOLOGY FUND
Charles Schwab & Co., Inc. 7,232,117 45.15%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 3,738,902 23.34%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
National Investors Service Corp. 1,082,898 6.76%
FBO Customers
55 Water Street
New York, New York 10041-0098
BALANCED FUND
Pacific Northwest Employers 1,384,962 86.94%
Pension Plan
Pacific Maritime Association 155,751 9.78%
Compensation Plan
P.O. Box 7861
San Francisco, California
GLOBAL SMALL CAP FUND
Dean Witter Discover & Co. 528,360 28.78%
333 Market Street 25th Floor
San Francisco, California 94105-2102
Charles Schwab & Co. 527,574 28.20%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 398,858 21.32%
FBO Customer
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
National Investors Service Corp. 119,995 6.41%
FBO Customers
55 Water Street
New York, New York 10041-0098
GLOBAL TECHNOLOGY FUND
<PAGE>
Charles Schwab & Co., Inc. 4,113,758 35.02%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 2,550,890 21.71%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
National Investors Service Corp. 641,046 5.46%
FBO Customers
55 Water Street
New York, New York 10041-0098
GLOBAL HEALTH CARE FUND
Charles Schwab & Co., Inc. 1,900,703 39.50%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 1,528,420 31.76%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
National Investors Service Corp. 462,749 9.62%
FBO Customers
55 Water Street
New York, New York 10041-0098
INTERNATIONAL GROWTH EQUITY FUND
Citigroup Inc. Pension Plan 3,397,203 19.23%
1 Court Square 15th Floor
Long Island City, New York 11120-0001
JM Family Enterprises Inc. 1,615,782 9.14%
100 NW 12th Avenue
Deerfield Beach, Florida 33442
Boston Safe Deposit and Trust Company 1,170,340 6.62%
FBO Blue Cross and Blue Shield of
Massachusetts Retirement Income Trust
Boston, Massachusetts 02110
EMERGING MARKETS FUND
Clients of Dresdner Bank AG/ 300,000 51.95%
Investment Management
Institutional Asset Management Division
Jorgen-Ponto-Platz
60301 Frankfurt
Germany
<PAGE>
Charles Schwab & Co., Inc. 123,350 21.36%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 88,169 15.27%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
EUROPE FUND
Charles Schwab & Co., Inc. 1,082,453 21.92%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 432,659 8.76%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
Smith Barney 294,192 5.96%
388 Greenwich Street
New York, New York 10013-2339
Marshcove & Co. 290,930 5.89%
P.O. Box 5756
Boston, Massachusetts 02206-0001
</TABLE>
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION FOUND IN THE SECTION
ENTITLED "THE INVESTMENT MANAGER" BEGINNING AT PAGE 44 OF THE SAI.
All management fees paid by the International Fund and Europe Fund prior to
their proposed reorganizations, from series of the Capital Company and the
Investment Company, respectively, to series of the Global Company, will be
paid under their investment management agreements.
THE FOLLOWING INFORMATION REPLACES THE SIMILAR INFORMATION FOUND IN THE SECTION
ENTITLED "THE DISTRIBUTOR" AT PAGE 46 OF THE SAI.
After the reorganizations, the Dresdner RCM International Growth Equity Fund
and Dresdner RCM Europe Fund will be included in the Global Company's
Distribution and Service Plan adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION FOUND IN THE SECTION ENTITLED
"GENERAL INFORMATION" AT PAGE 56 OF THE SAI.
The Global Company was incorporated in Maryland as an open-end management
investment company on September 17, 1995. The authorized capital stock of the
Global Company is 3,000,000,000 shares of capital stock (par value $.0001 per
share) of which 100,000,000 shares have been designated as shares of the
International Growth Equity Fund and the Small Cap Fund, 400,000,000 shares have
been designated as shares of the MidCap Growth Fund, 200,000,000 shares have
been designated as shares of the Europe Fund, 50,000,000 shares have been
<PAGE>
designated as shares of each of the Global Technology Fund, Global Small Cap
Fund, Global Health Care Fund, Large Cap Fund, Biotechnology Fund, Emerging
Markets Fund, Tax Managed Growth Fund Global Equity Fund and Strategic Income
Fund and 25,000,000 shares have been designated as shares of the Balanced Fund.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION FOUND IN THE SECTION ENTITLED
"COUNSEL" AT PAGE 57 OF THE SAI.
Certain legal matters in connection with the capital shares offered by the
Global Company have been passed upon by Paul, Hastings, Janofsky & Walker LLP,
555 South Flower Street, Los Angeles, California 90071. The validity of the
capital stock offered by the Global Company has been passed upon by Venable,
Baetjer and Howard, LLP, 1800 Mercantile Bank & Trust Building, 2 Hopkins Plaza,
Baltimore, Maryland 21201. Paul, Hastings, Janofsky & Walker LLP has acted and
will continue to act as counsel to the Investment Manager in various matters.
Wilmer, Cutler & Pickering acts as counsel to the independent directors of the
Global Company.
THE FOLLOWING INFORMATION SUPPLEMENTS THE INFORMATION FOUND IN THE SECTION
ENTITLED "FINANCIAL STATEMENTS' AT PAGE 58 OF THE SAI.
Incorporated by reference herein are the financial statements of the Funds'
contained in the Funds' Semi-Annual Report to Shareholders for the six-month
period ended June 30, 2000, including the Statements of Assets and
Liabilities, including the Portfolios of Investments and the related
Statements of Operations, the Statements of Changes in Net Assets and the
Financial Highlights.
<PAGE>
[LETTERHEAD]
DRESDNER RCM LARGE CAP GROWTH FUND
DRESDNER RCM TAX MANAGED GROWTH FUND
DRESDNER RCM BIOTECHNOLOGY FUND
DRESDNER RCM BALANCED FUND
DRESDNER RCM GLOBAL SMALL CAP FUND
DRESDNER RCM GLOBAL TECHNOLOGY FUND
DRESDNER RCM GLOBAL HEALTH CARE FUND
DRESDNER RCM INTERNATIONAL GROWTH EQUITY FUND
DRESDNER RCM EMERGING MARKETS FUND
DRESDNER RCM EUROPE FUND
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2000
Dresdner RCM International Growth Equity Fund (the "International Fund") is a
series of Dresdner RCM Capital Funds, Inc. (the "Capital Company"), an open-end
management investment company. Dresdner RCM Europe Fund (the "Europe Fund") is a
series of Dresdner RCM Investment Funds Inc. (the "Investment Company"), an
open-end management investment company. Dresdner RCM Large Cap Growth Fund (the
"Large Cap Fund"), Dresdner RCM Tax Managed Growth Fund (the "Tax Managed Growth
Fund"), Dresdner RCM Biotechnology Fund (the "Biotechnology Fund"), Dresdner RCM
Balanced Fund (the "Balanced Fund"), Dresdner RCM Global Small Cap Fund (the
"Global Small Cap Fund"), Dresdner RCM Global Technology Fund (the "Global
Technology Fund"), Dresdner RCM Global Health Care Fund (the "Global Health Care
Fund"), and Dresdner RCM Emerging Markets Fund (the "Emerging Markets Fund"),
are series (each, together with the International Fund and the Europe Fund, a
"Fund" and, together, the "Funds") of Dresdner RCM Global Funds, Inc. (the
"Global Company" and, with the Capital Company and the Investment Company, the
"Companies"), an open-end management investment company. The Funds' investment
manager is Dresdner RCM Global Investors LLC (the "Investment Manager"). All the
Funds are diversified except the Global Technology Fund, the Global Health Care
Fund, the Biotechnology Fund, the International Fund and the Europe Fund.
This Statement of Additional Information ("SAI") is not a prospectus, and should
be read in conjunction with the Prospectus of the Funds dated May 1, 2000. This
SAI relates to the Funds' Non-Institutional Class ("Class N") and Institutional
Class ("Class I") of shares. The Prospectus may be obtained without charge by
writing or calling the Companies at the address and phone number above.
Incorporated by reference herein are the financial statements of the Funds
contained in the Funds' Annual Report to Shareholders for the year ended
December 31, 1999, including the Report of Independent Accountants, dated
February 18, 2000, the Statements of Assets and Liabilities, including the
Portfolio of Investments and the related Statements of Operations, Statements of
Changes in Net Assets, and the Financial Highlights. Copies of the Funds' Annual
and Semi-Annual Reports to Shareholders are available, upon request, by calling
(800) 726-7240, or by writing to Four Embarcadero Center, San Francisco,
California 94111.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives and Policies....................................3
Risk Considerations..................................................22
Investment Restrictions..............................................28
Executions of Portfolio Transactions.................................31
Directors and Officers...............................................34
Control Persons and Principal Holders of Securities..................39
The Investment Manager...............................................44
The Distributor......................................................46
The Administrator....................................................47
Other Service Providers..............................................48
Net Asset Value......................................................48
Purchase and Redemption of Shares....................................49
Dividends, DIstributions and Tax Status..............................50
Investment Results...................................................53
General Information..................................................56
Description of Capital Shares........................................56
Additional Information...............................................57
Financial Statements.................................................58
Page 2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT CRITERIA
In evaluating particular investment opportunities, the Investment
Manager may consider such other factors, in addition to those described in the
Prospectus, as the anticipated economic growth rate, the political outlook, the
anticipated inflation rate, the currency outlook, and the interest rate
environment for the country and the region in which a particular issuer is
located. When the Investment Manager believes it would be appropriate and
useful, the Investment Manager's personnel may visit the issuer's headquarters
and plant sites to assess an issuer's operations and to meet and evaluate its
key executives. The Investment Manager also will consider whether other risks
may be associated with particular securities.
INVESTMENT IN FOREIGN SECURITIES
The securities markets of many countries have at times in the past
moved relatively independently of one another due to different economic,
financial, political, and social factors. In seeking to achieve the investment
objectives of the Funds, the Investment Manager allocates the Funds' assets
among securities of countries and in currency denominations where it expects
opportunities for meeting the Funds' investment objectives to be the most
attractive, subject to the percentage limitations set forth in the Prospectus.
In addition, from time to time a Fund may strategically adjust its investments
among issuers based in various countries and among the various equity markets of
the world in order to take advantage of diverse global opportunities, based on
the Investment Manager's evaluation of prevailing trends and developments, as
well as on the Investment Manager's assessment of the potential for capital
appreciation (as compared to the risks) of particular companies, industries,
countries, and regions.
INVESTMENT IN DEVELOPED FOREIGN COUNTRIES. The Large Cap Fund, Tax
Managed Growth Fund, Biotechnology Fund, Balanced Fund and Emerging Markets Fund
may, and each of the other Funds will, invest in securities of foreign
governments and companies that are organized or headquartered in developed
foreign countries. A Fund may not be invested in all developed foreign countries
at one time, and may not invest in particular developed foreign countries at any
time, depending on the Investment Manager's view of the investment opportunities
available.
Although these countries have developed economies, even developed
countries may be subject to periods of economic or political instability. For
example, efforts by the member countries of the European Union to eliminate
internal barriers to the free movement of goods, persons, services and capital
have encountered opposition arising from the conflicting economic, political and
cultural interests and traditions of the member countries and their citizens.
Similarly, events in the Japanese economy and social developments may affect
Japanese securities and currency markets, as well as the relationship of the
Japanese yen to the U.S. dollar. Future political, economic and social
developments can be expected to produce continuing effects on securities and
currency markets in these and other developed foreign countries.
INVESTMENT IN EMERGING MARKETS. Each Fund (except the Balanced Fund)
may, and the Emerging Markets Fund will, invest in securities of developing
countries with emerging markets and companies organized or headquartered in such
countries. As a general matter, countries that are not considered to be
developed foreign countries by the Investment Manager will be deemed to be
emerging market countries. Emerging market countries include any country
generally considered to be an emerging market or developing country by the World
Bank, the International Finance Corporation, the United Nations or its
authorities, or other recognized financial institutions. As of the date of this
SAI, emerging market countries are deemed to include for purposes of this SAI,
all foreign countries other than Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Ireland, Italy, Japan, Luxembourg, The Netherlands,
New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, and the United
Kingdom. (See INVESTMENT IN DEVELOPED FOREIGN COUNTRIES.) As their economies
grow and their markets grow and mature, some countries that currently may be
characterized by the Investment Manager as emerging market countries may be
deemed by the Investment Manager to be developed foreign countries. In the event
that the Investment Manager
Page 3
<PAGE>
deems a particular country to be a developed foreign country, any investment in
securities issued by that country's government or by an issuer located in that
country would not be subject to a Fund's overall limitations on investments in
emerging market countries.
Securities of issuers organized or headquartered in emerging market
countries may, at times, offer excellent opportunities for current income and
capital appreciation. However, prospective investors should be aware that the
markets of emerging market countries historically have been more volatile than
the markets of the United States and developed foreign countries, and thus the
risks of investing in securities of issuers organized or headquartered in
emerging market countries may be far greater than the risks of investing in
developed foreign markets. (See RISK CONSIDERATIONS--EMERGING MARKET SECURITIES
for a more detailed discussion of the risk factors associated with investments
in emerging market securities.) In addition, movements of emerging market
currencies historically have had little correlation with movements of developed
foreign market currencies. Prospective investors should consider these risk
factors carefully before investing in a Fund. Some emerging market countries
have currencies whose value is closely linked to the U.S. dollar. Emerging
market countries also may issue debt denominated in U.S. dollars and other
currencies.
It is unlikely that a Fund will be invested in securities in all
emerging market countries at any time. Moreover, investing in some emerging
markets currently may not be desirable or feasible, due to lack of adequate
custody arrangements for Fund assets, overly burdensome repatriation or similar
restrictions, the lack of organized and liquid securities markets, unacceptable
political risks, poor values of investments in those markets relative to
investments in other emerging markets, in developed foreign markets, or in the
United States, or for other reasons.
CURRENCY MANAGEMENT
Securities purchased by the Funds may be denominated in U.S. dollars,
foreign currencies, or multinational currencies such as the Euro, and the Funds
will incur costs in connection with conversions between various currencies.
Movements in the various securities markets may be offset by changes in foreign
currency exchange rates. Exchange rates frequently move independently of
securities markets in a particular country. As a result, gains in a particular
securities market may be affected, either positively or negatively, by changes
in exchange rates, and a Fund's net currency positions may expose it to risks
independent of its securities positions.
From time to time, the Funds may employ currency management techniques
(other than currency futures contracts in the case of the Europe Fund) to
enhance their total returns, although there is no current intention to do so. A
Fund may not employ more than 30% of the value of its total assets in currency
management techniques for the purpose of enhancing returns. To the extent that
such techniques are used to enhance return, they are considered speculative.
A Fund's ability and decision to purchase or sell portfolio securities
may be affected by the laws or regulations in particular countries relating to
convertibility and repatriation of assets. Because the shares of the Funds are
redeemable in U.S. dollars each day the Funds determine their net asset value,
the Funds must have the ability at all times to obtain U.S. dollars to the
extent necessary to meet redemptions. Under present conditions, the Investment
Manager does not believe that these considerations will have any significant
adverse effect on its portfolio strategies, although there can be no assurances
in this regard.
GENERAL CURRENCY CONSIDERATIONS. Currency exchange rates may fluctuate
significantly over short periods of time causing, along with other factors, a
Fund's net asset value to fluctuate as well. Currency exchange rates generally
are determined by the forces of supply and demand in the foreign exchange
markets and the relative merits of investments in different countries, actual or
anticipated changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention, or failure to do so, by U.S. or foreign
governments or central banks or by currency controls or political developments
in the United States or abroad. The markets in forward foreign currency exchange
contracts, currency swaps and other privately negotiated currency instruments
offer less protection against defaults by the other party to such instruments
than is available for currency instruments traded on an exchange. To the extent
that a substantial portion of a Fund's total assets, adjusted to reflect the
Fund's net position after giving effect to currency transactions, is denominated
or
Page 4
<PAGE>
quoted in the currencies of foreign countries, the Fund will be more susceptible
to the risk of adverse economic and political developments within those
countries.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Each Fund may purchase or
sell forward foreign currency exchange contracts ("forward contracts") for
hedging purposes or to seek to increase total return when the Investment Manager
anticipates that a foreign currency will appreciate or depreciate in value, but
securities denominated or quoted in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. When
purchased or sold to increase total return, forward contracts are considered
speculative. In addition, a Fund may enter into forward contracts in order to
protect against anticipated changes in future foreign currency exchange rates.
Each Fund may engage in cross-hedging by using forward contracts in a
currency different from that in which the hedged security is denominated or
quoted if the Investment Manager determines that there is a pattern of
correlation between the two currencies. Each such Fund may also engage in proxy
hedging, by using forward contracts in a series of foreign currencies for
similar purposes.
Each Fund may enter into forward contracts to purchase foreign
currencies to protect against an anticipated rise in the U.S. dollar price of
securities it intends to purchase. Each such Fund may enter into forward
contracts to sell foreign currencies to protect against the decline in value of
its foreign currency denominated or quoted portfolio securities, or a decline in
the value of anticipated income or dividends from such securities, due to a
decline in the value of foreign currencies against the U.S. dollar. Forward
contracts to sell foreign currency could limit any potential gain which might be
realized by a Fund if the value of the hedged currency increased.
If a Fund enters into a forward contract to sell foreign currency to
increase total return or to buy foreign currency for any purpose, the Fund will
segregate cash, U.S. Government securities, or other liquid debt or equity
securities with the Fund's custodian in an amount equal to the value of the
Fund's total assets committed to the consummation of the forward contract. If
the value of the segregated securities declines, additional assets will be
segregated so that the value of the segregated assets will equal the amount of
the Fund's commitment with respect to the contract.
A forward contract is subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward contract is not
guaranteed by an exchange or clearinghouse, a default on the contract would
deprive a Fund of unrealized profits, transaction costs or the benefits of a
currency hedge or force the Fund to cover its purchase or sale commitments, if
any, at the current market price.
OPTIONS ON FOREIGN CURRENCIES. Each Fund may purchase and sell (write)
put and call options on foreign currencies for the purpose of protecting against
declines in the U.S. dollar value of foreign portfolio securities and
anticipated income or dividends on such securities and against increases in the
U.S. dollar cost of foreign securities to be acquired. Each such Fund may also
use options on currency to cross-hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different currency, if the Investment Manager believes there is a pattern of
correlation between the two currencies. Options on foreign currencies to be
written or purchased by the Funds will be traded on U.S. and foreign exchanges.
The writer of a put or call option receives a premium and gives the
purchaser the right to sell (or buy) the currency underlying the option at the
exercise price. The writer has the obligation upon exercise of the option to
purchase (or deliver) the currency during the option period. A writer of an
option who wishes to terminate the obligation may effect a "closing transaction"
by buying an option of the same series as the option previously written. A
writer may not effect a closing purchase transaction after being notified of the
exercise of an option. The writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received; a
Fund could be required to purchase or sell additional foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to a
Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
Page 5
<PAGE>
Each Fund may purchase call or put options on a currency to seek to
increase total return when the Investment Manager anticipates that the currency
will appreciate or depreciate in value, but the securities quoted or denominated
in that currency do not present attractive investment opportunities and are not
held in the Fund's portfolio.
When a Fund writes a put or call option on a foreign currency, an
amount of cash, U.S. Government securities, or other liquid debt or equity
securities equal to the market value of its obligations under the option will be
segregated by the Fund's custodian to collateralize the position.
CURRENCY FUTURES CONTRACTS. Each Fund (other than the Europe Fund) may
enter into currency futures contracts, as described under "Futures Transactions"
below.
CURRENCY SWAPS. Each Fund may enter into currency swaps for both
hedging and to seek to increase total return. Currency swaps involve the
exchange of rights to make or receive payments in specified currencies. Since
currency swaps are individually negotiated, the Funds expect to achieve an
acceptable degree of correlation between their portfolio investments and their
currency swap positions entered into for hedging purposes. Currency swaps may
involve the delivery of the entire principal value of one designated currency in
exchange for the other designated currency, or the delivery of the net amount of
a party's obligations over its entitlements. Therefore, the entire principal
value of a currency swap may be subject to the risk that the other party to the
swap will default on its contractual delivery obligations. Each Fund will
maintain in a segregated account with the Fund's custodian cash, U.S. Government
securities, or other liquid debt or equity securities equal to the amount of the
Fund's obligations, or the net amount (if any) of the excess of the Fund's
obligations over its entitlements, with respect to swap transactions. To the
extent that such amount of a swap is segregated, the Company and the Investment
Manager believe that swaps do not constitute senior securities under the
Investment Company Act of 1940 (the "1940 Act") and, accordingly, will not treat
them as being subject to a Fund's borrowing restriction.
The use of currency swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Manager is
incorrect in its forecasts of market values and currency exchange rates, the
investment performance of a Fund entering into a currency swap would be less
favorable than it would have been if this investment technique were not used.
INTEREST RATE SWAPS. The Balanced Fund may enter into interest rate
swaps, caps and floors and will usually enter into interest rate swaps on a net
basis (i.e. the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments). The net
amount of the excess, if any, of the Fund's obligations over its entitlement
with respect to each interest rate swap will be calculated on a daily basis and
an amount of cash or other liquid assets having an aggregate net asset value at
least equal to the accrued excess will be maintained in a segregated account by
the Fund's custodian. If the Fund enters into an interest rate swap on other
than a net basis it will maintain a segregated account in the full amount
accrued on a daily basis of its obligations with respect to the swap. The Fund
will not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated in one of the three highest rating categories of at least one Nationally
Recognized Rating Organization at the time of entering into such transaction.
The Investment Manager will monitor the creditworthiness of all counterparties
on an ongoing basis. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting as principals and as agents
using standardized swap documentation. The Investment Manager has determined
that, as a result, the swap market has become relatively liquid. Cap and floors
are more recent innovations for which standardized documentation has not been
developed and, accordingly, they are less liquid than swaps. To the extent the
Fund sells (i.e. writes) caps and floors, it will segregate cash or other liquid
assets having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of its obligations with respect to any caps or floors.
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There is no limit on the amount of interest rate swap transactions that
may be entered into by the Fund. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Fund or its
counterparty to collateralize obligations under the swap. Under the
documentation currently used in the swap markets, the risk of loss with respect
to interest rate swaps is limited to the net amount of the payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap that is not collateralized defaults, the Fund would risk the loss of the
net amount of the payments that it contractually is entitled to receive. The
Fund may buy and sell (i.e. write) caps and floors without limitation, subject
to the segregation requirement described above.
OPTIONS TRANSACTIONS
Each Fund may purchase listed put and call options on any securities
which it is eligible to purchase as a hedge against changes in market conditions
that may result in changes in the value of the Fund's portfolio securities. The
aggregate premiums on put options and call options purchased by a Fund may not
in each case exceed 5% of the value of the net assets of the Fund as of the date
of purchase. In addition, a Fund will not purchase options if more than 25% of
the value of its net assets would be hedged.
A put gives the holder the right, in return for the premium paid, to
require the writer of the put to purchase from the holder a security at a
specified price. A call gives the holder the right, in return for the premium
paid, to require the writer of the call to sell a security to the holder at a
specified price. Put and call options on various stocks and financial indices
are traded on U.S. and foreign exchanges. A put option is covered if the writer
segregates cash, U.S. Government securities or other liquid debt or equity
securities equal to the exercise price. A call option is covered if the writer
owns the security underlying the call or has an absolute and immediate right to
acquire the security without additional cash consideration upon conversion or
exchange of other securities held by it.
A Fund may effectively terminate its right or obligation under an
option by entering into a closing transaction. For example, a Fund may terminate
its obligation under a put or call option that it had written by purchasing an
identical put or call option; this is known as a closing purchase transaction.
Conversely, a Fund may terminate a position in a put or call option that it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. A Fund realizes a gain from a closing transaction if the cost
of the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option.
PURCHASING PUT AND CALL OPTIONS
PUT OPTIONS. If a Fund purchases a put option, the Fund acquires the
right to sell the underlying security at a specified price at any time during
the term of the option (for "American-style" options) or on the option
expiration date (for "European-style" options). Purchasing put options may be
used as a portfolio investment strategy when the Investment Manager perceives
significant short-term risk but substantial long-term appreciation for the
underlying security. The put option acts as an "insurance policy", as it
protects against significant downward price movement while it allows full
participation in any upward movement. If a Fund is holding a security which the
Investment Manager feels has strong fundamentals, but for some reason may be
weak in the near term, the Fund may purchase a put option on such security,
thereby giving itself the right to sell such security at a certain strike price
throughout the term of the option. Consequently, the Fund will exercise the put
only if the price of such security falls below the strike price of the put. The
difference between the strike price of the put and the market price of the
underlying security on the date the Fund exercises the put, less transaction
costs, will be the amount by which the Fund will be able to hedge against a
decline in the underlying security. If during the period of the option the
market price for the underlying security remains at or above the put's strike
price, the put will expire worthless, representing a loss of the price the Fund
paid for the put, plus transaction costs. If the price of the underlying
security increases, the profit the Fund realizes on the sale of the security
will be reduced by the premium paid for the put option less any amount for which
the put may be sold.
CALL OPTIONS. If a Fund purchases a call option, it acquires the right
to purchase the underlying security at a specified price at any time during the
term of the option. The purchase of a call option is a type of "insurance
policy" to hedge against losses that could incur if a Fund intends to purchase
the underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price
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at the time of exercise. If during the option period the market price for the
underlying security remains at or below the strike price of the call option, the
option will expire worthless, representing a loss of the price paid for the
option, plus transaction costs. If the price of the underlying security
increases, the price the Fund pays for the security will in effect be increased
by the premium paid for the call.
WRITING PUT AND CALL OPTIONS. Writing covered put or call options can
enable a Fund to enhance income by reason of the premiums paid by the purchasers
of such options. When a Fund writes a put option, the purchaser acquire the
right to sell to the Fund the underlying security at a specified price at any
time during the term of the option or on the option expiration date. When a Fund
writes a call option, the purchaser acquires the right to purchase from the Fund
the underlying security at a specified price at any time during the term of the
option. In return for the premium received for a call option, a Fund foregoes
the opportunity for profit from a price increase in the underlying security
above the exercise price so long as the option remains open, but retains the
risk of loss should the price of the security decline. In return for the premium
received for a put option, a Fund assumes the risk that the price of the
underlying security will decline below the exercise price, in which case the put
would be exercised and the Fund would suffer a loss.
STOCK INDEX OPTIONS. Each Fund may purchase put and call options with
respect to stock indices such as the S&P 500 Index and other stock indices. Such
options may be purchased as a hedge against changes resulting from market
conditions in the values of securities which are held in a Fund's portfolio or
which it intends to purchase or sell, or when they are economically appropriate
for the reduction of risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks that are not present with stock options generally. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether a Fund will realize a gain or loss
on the purchase or sale of an index option depends upon movements in the level
of stock prices in the stock market generally rather than movements in the price
of a particular stock. Accordingly, successful use by a Fund of options on a
stock index will be subject to the Investment Manager's ability to predict
correctly movements in the direction of the stock market generally. This
requires different skills and techniques than predicting changes in the prices
of individual stocks.
Index prices may be distorted if trading of certain stocks included in
an index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, a Fund would not be able to
close out options which it had purchased, and if restrictions on exercise were
imposed, the Fund might be unable to exercise an option it holds, which could
result in substantial losses to the Fund. It is the policy of the Funds to
purchase put or call options only with respect to an index which the Investment
Manager believes includes a sufficient number of stocks to minimize the
likelihood of a trading halt in the index.
DEALER OPTIONS. Each Fund may engage in transactions involving dealer
options as well as exchange-traded options. Options not traded on an exchange
generally lack the liquidity of an exchange-traded option, and may be subject to
a Fund's restriction on investment in illiquid securities. In addition, dealer
options may involve the risk that the securities dealers participating in such
transactions will fail to meet their obligations under the terms of the options.
SHORT SALES
Each Fund, except the International Fund, may engage in short sales
transactions. Although the International Fund may not make short sales of
securities, it may maintain short positions in connection with its use of
options, futures contracts, options on futures contracts, forward foreign
currency exchange transactions, and currency options. A short sale that is not
made "against the box" is a transaction in which a Fund sells a security it does
not own in anticipation of a decline in market price. When a Fund makes a short
sale, the proceeds it receives are retained by the broker until the Fund
replaces the borrowed security. In order to deliver the security to the buyer,
the Fund must arrange through a broker to borrow the security and, in so doing,
the Fund becomes obligated to replace the security borrowed at its market price
at the time of replacement, whatever that price may be.
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The value of securities of any issuer in which a Fund maintains a short
position that is not "against the box" may not exceed the lesser of 5% of the
value of the Fund's net assets or 5% of the securities of such class of the
issuer. A Fund's ability to enter into short sales transactions is limited by
the requirements of the Investment Company Act of 1940 (the "1940 Act").
Short sales by a Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
special risk considerations and may be considered a speculative technique. Since
a Fund in effect profits from a decline in the price of the securities sold
short without the need to invest the full purchase price of the securities on
the date of the short sale, the Fund's net asset value per share will tend to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. Short
sales theoretically involve unlimited loss potential, as the market price of
securities sold short may continuously increase, although a Fund may mitigate
such losses by replacing the securities sold short before the market price has
increased significantly. Under adverse market conditions, a Fund might have
difficulty purchasing securities to meet its short sale delivery obligations,
and might have to sell portfolio securities to raise the capital necessary to
meet its short sale obligations at a time when fundamental investment
considerations would not favor such sales.
If a Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. A Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Investment Manager believes
that the price of a security may decline, causing a decline in the value of a
security owned by the Fund or a security convertible into or exchangeable for
such security. In such case, any future losses in the Fund's long position would
be reduced by a gain in the short position.
In the view of the Securities and Exchange Commission ("SEC"), a short
sale involves the creation of a "senior security" as such term is defined in the
1940 Act, unless the sale is "against the box" and the securities sold are
placed in a segregated account (not with the broker), or unless the Fund's
obligation to deliver the securities sold short is "covered" by segregating (not
with the broker) cash, U.S. Government securities or other liquid debt or equity
securities in an amount equal to the difference between the market value of the
securities sold short at the time of the short sale and any cash or securities
required to be deposited as collateral with a broker in connection with the sale
(not including the proceeds from the short sale), which difference is adjusted
daily for changes in the value of the securities sold short. The total value of
the cash and securities deposited with the broker and otherwise segregated may
not at any time be less than the market value of the securities sold short at
the time of the short sale.
To avoid limitations under the 1940 Act on borrowing by investment
companies, short sales by each Fund will be "against the box", or the Fund's
obligation to deliver the securities sold short will be "covered" by segregating
cash, U.S. Government securities or other liquid debt or equity securities in an
amount equal to the market value of its delivery obligation. A Fund will not
make short sales of securities or maintain a short position if doing so could
create liabilities or require collateral deposits and segregation of assets
aggregating more than 25% of the value of the Fund's total assets.
DELAYED-DELIVERY TRANSACTIONS
Each Fund (other than the Europe Fund) may purchase securities on a
delayed delivery or "when issued" basis and may enter into firm commitment
agreements (transactions in which the payment obligation and interest rate are
fixed at the time of the transaction but the settlement is delayed). Delivery
and payment for these securities typically occur 15 to 45 days after the
commitment to purchase, but delivery and payment can be scheduled for shorter or
longer periods, based upon the agreement of the buyer and the seller. No
interest accrues to the purchaser during the period before delivery. The Funds
generally do not intend to enter into these transactions for the purpose of
leverage, but may sell the right to receive delivery of the securities before
the settlement date. The value of the securities at settlement may be more or
less than the agreed upon price.
A Fund will segregate cash, U.S. Government securities or other liquid
debt or equity securities in an amount sufficient to meet its payment
obligations with respect to any such transactions. To the extent that assets are
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segregated for this purpose, a Fund's liquidity and the ability of the
Investment Manager to manage its portfolio may be adversely affected.
FUTURES TRANSACTIONS
The Funds (other than the Europe Fund) may enter into futures contracts
for the purchase or sale of fixed-income securities, foreign currencies or
contracts based on financial indices, including indices of U.S. government
securities, foreign government securities, equity securities or fixed-income
securities. For example, if a Fund owns Treasury bonds and the portfolio manager
expects interest rates to increase, that Fund may take a short position in
interest rate futures contracts. Taking such a position would have much the same
effect as that Fund selling Treasury bonds in its portfolio. If interest rates
increase as anticipated, the value of the Treasury bonds would decline, but the
value of that Fund's interest rate futures contract will increase, thereby
keeping the net asset value of that Fund from declining as much as it may have
otherwise. If, on the other hand, a portfolio manager expects interest rates to
decline, the Fund may take a long position in interest rate futures contracts in
anticipation of later closing out the futures position and purchasing the bonds.
Although a Fund can accomplish similar results by buying securities with long
maturities and selling securities with short maturities, given the greater
liquidity of the futures market than the cash market, it may be possible to
accomplish the same result more easily and more quickly by using futures
contracts as an investment tool to reduce risk.
The Europe Fund may enter into futures contracts for the purchase or
sale of foreign stock or bond indices or other financial indices that the
Investment Manager determines are appropriate to hedge the risks associated with
changes in interest rates or general fluctuations in the value of its portfolio
securities. Pursuant to the regulations of the Commodity Futures Trading
Commission ("CFTC"), and subject to certain restrictions, the Fund may purchase
or sell futures contracts that are traded on U.S. exchanges that have been
designated as contract markets by the CFTC. The Fund may also generally purchase
or sell futures contracts that are subject to the rules of any foreign board of
trade ("foreign futures contracts"). The Fund may not, however, trade a foreign
futures contract based on a foreign stock index unless the contract has been
approved by the CFTC for trading by U.S. persons. The Investment Manager may
comply with such different standards as may be established by the CFTC with
respect to the purchase or sale of futures contracts and foreign futures
contracts.
FUTURES CHARACTERISTICS. A futures contract is an agreement between two
parties (buyer and seller) to take or make delivery of an amount of cash equal
to the difference between the value of the currency, security or index at the
close of the last trading day of the contract and the price at which the
currency, security or index contract was originally written. In the case of
futures contracts traded on U.S. exchanges, the exchange itself or an affiliated
clearing corporation assumes the opposite side of each transaction (i.e., as
buyer or seller). A futures contract may be satisfied or closed out by payment
of the change in the cash value of the currency, security or index. No physical
delivery of the underlying currency, securities, or securities in the index is
made.
Unlike when a Fund purchases or sells a security, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the Fund's custodian or such other
parties as may be authorized by the SEC (in the name of the futures commission
merchant (the "FCM")) an amount of cash or U.S. Treasury bills which is referred
to as an "initial margin" payment. The nature of initial margin in futures
transactions is different from that of margin in security transactions in that a
futures contract margin does not involve the borrowing of funds by a Fund to
finance the transactions. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts customarily are purchased and
sold with initial margins that may range upwards from less than 5% of the value
of the futures contract being traded. Subsequent payments, called "variation
margin", to and from the FCM, will be made on a daily basis as the price of the
underlying currency or stock index varies, making the long and short positions
in the futures contract more or less valuable. This process is known as "marking
to the market." For example, when a Fund has purchased a currency futures
contract and the price of the underlying currency has risen, the Fund's position
will have increased in value and the Fund will receive from the FCM a variation
margin payment equal to that increased value. Conversely, when a Fund has
purchased a currency futures contract and the price of the underlying currency
has declined, the position would be less valuable and the Fund would be required
to make a variation margin payment to the FCM. At any time prior to expiration
of a futures
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contract, a Fund may elect to close the position by taking an identical opposite
position which will operate to terminate the Fund's position in the futures
contract. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain.
CHARACTERISTICS OF FUTURES OPTIONS. Each Fund (other than the Europe
Fund) may also purchase call options and put options on securities or index
futures contracts ("futures options"), and each Fund (other than the Europe
Fund) may purchase futures options on currencies. A futures option gives the
holder the right, in return for the premium paid, to assume a long position (in
the case of a call) or short position (in the case of a put) in a futures
contract at a specified exercise price prior to the expiration of the option.
Upon exercise of a call option, the holder acquires a long position in the
futures contract and the writer is assigned the opposite short position. In the
case of a put option, the opposite is true. A futures option may be closed out
(before exercise or expiration) by an offsetting purchase or sale of a futures
option of the same series.
PURCHASE OF FUTURES. Each Fund (other than the Europe Fund) may
purchase a currency futures contract when it anticipates the subsequent purchase
of particular securities and has the necessary cash, but expects the currency
exchange rates then available in the applicable market to be less favorable than
rates that are currently available, or to attempt to enhance return when it
anticipates that future currency exchange rates will be more favorable than
current rates. Similarly, when the Investment Manager anticipates a significant
stock market or stock market sector advance, a Fund may purchase a stock index
futures contract which affords a hedge against not participating in such advance
at a time when the Fund is not fully invested in equity securities. Such
purchase of a futures contract would serve as a temporary substitute for the
purchase of individual stocks which may later be purchased (with attendant
costs) in an orderly fashion. As such purchase of individual stocks are made, an
approximately equivalent amount of stock index futures would be terminated by
offsetting sales.
SALE OF FUTURES. Each Fund (other than the Europe Fund) may sell a
currency futures contract to hedge against an anticipated decline in foreign
currency rates that would adversely affect the dollar value of a Fund's
portfolio securities denominated in such currency, or may sell a currency
futures contract in one currency to hedge against fluctuations in the value of
securities denominated in a different currency if there is an established
historical pattern or correlation between the two currencies. Similarly, a Fund
may sell stock index futures contracts in anticipation of or during a general
stock market or market sector decline that may adversely affect the market
values of the Fund's portfolio of equity securities. To the extent that the
Fund's portfolio of equity securities changes in value in correlation with a
given stock index, the sale of futures contracts on that index would reduce the
risk to the portfolio of a market decline and, by doing so, would provide an
alternative to the liquidation of securities positions in the portfolio with
resultant transaction costs.
PURCHASE OF PUT OPTIONS ON FUTURES. The purchase of a put option on a
currency, financial or index futures contract is analogous to the purchase of a
put on individual stocks, where an absolute level of protection from price
fluctuation is sought below which no additional economic loss would be incurred
by a Fund. For example, put options on futures may be purchased to hedge a
portfolio of stocks or a position in the futures contract upon which the put
option is based against a possible decline in market value. The purchase of a
put option on a currency futures contract can be used to hedge against
unfavorable movements in currency exchange rates, or to attempt to enhance
returns in contemplation of movements in such rates.
PURCHASE OF CALL OPTIONS ON FUTURES. The purchase of a call option on a
currency, financial or index futures contract represents a means of obtaining
temporary exposure to favorable currency exchange rate or interest rate
movements or temporary exposure to market appreciation with risk limited to the
premium paid for the call option. It is analogous to the purchase of a call
option on an individual security or index, which can be used as a substitute for
a position in the security or index itself. Depending on the pricing of the
option compared to either the futures contract upon which it is based, or to the
price of the underlying currency, security or index itself, the call option may
be less risky, because losses are limited to the premium paid for the call
option, when compared to the ownership of the underlying currency, security or
index futures contract. Like the purchase of a currency, financial or index
futures contract, a Fund would purchase a call option on a currency, financial
or index futures contract to hedge against an unfavorable movement in exchange
rates, interest rates or securities prices.
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LIMITATIONS ON PURCHASE AND SALE OF FUTURES AND FUTURES OPTIONS. A Fund
may not purchase or sell futures contracts or purchase futures options if,
immediately thereafter, more than 30% of the value of its net assets would be
hedged. In addition, a Fund may not purchase or sell futures or purchase futures
options if, immediately thereafter, the sum of the amount of margin deposits on
the Fund's existing futures positions and premiums paid for futures options
would exceed 5% of the market value of the Fund's total assets. In Fund
transactions involving futures contracts, to the extent required by applicable
SEC guidelines, an amount of cash, U.S. Government securities, or other liquid
debt or equity securities equal to the market value of the futures contracts
will be segregated with the Fund's Custodian, or in other segregated accounts as
regulations may allow, to collateralize the position and thereby to insure that
the use of such futures is unleveraged.
The International Fund will not engage in transactions in stock index
futures contracts and futures options for speculation, but only as a hedge
against changes in the value of securities held in the Fund's portfolio, or
securities which the Investment Manager intends to purchase for the portfolio,
resulting from actual or anticipated changes in general market conditions. Such
transactions will only be effected when, in the view of the Investment Manager,
they are economically appropriate to the reduction of risks inherent in the
ongoing management of the Fund's portfolio.
REGULATORY MATTERS. The Companies have filed claims of exemption from
registration of the Funds as commodity pools with the Commodity Futures Trading
Commission (the "CFTC"). Each Fund intends to conduct its futures trading
activity in a manner consistent with that exemption. The Investment Manager is
registered with the CFTC as both a commodity pool operator and as a commodity
trading advisor.
SWAPS
The Europe Fund may engage in securities index total return swaps with
approved counterparties. Securities index total return swaps involve an
agreement between two parties to exchange payments that are based on a specified
securities index and that are calculated on the basis of a set amount (the
"notional amount") for a specified period of time. The Fund may enter into
securities index total return swaps only to the extent that the notional amount
of all current swaps does not exceed 30% of the Fund's net assets. Generally,
the Fund will base its securities index total return swaps on its benchmark
index, MSCI Europe, or a separate market index such as the DAX100 or CAC100. The
Fund may, among other purposes, use securities index total return swaps to
provide the Fund with sufficient liquidity to meet cash redemptions of shares
while maintaining its investments in securities and foreign currencies or to
provide the Fund with sufficient exposure to the equity markets when it is
holding cash that is being held to meet redemptions or when incoming cash is not
yet invested. Swaps are subject to risks comparable to the risks involved with
respect to hedging transactions.
The Europe Fund may enter into securities index total return swaps and
will usually enter into securities index total return swaps on a net basis,
I.E., the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Inasmuch as
segregated accounts will be established with respect to such transactions, the
Investment Manager believes such obligations do not constitute senior securities
and, accordingly, will not treat them as being subject to the Fund's borrowing
restrictions. The net amount of the excess, if any, of the Fund's obligations
over its entitlements with respect to each securities index total return swap
will be accrued on a daily basis, and appropriate Fund assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account. The Fund also will establish and maintain
such segregated accounts with respect to its total obligations under any swaps
that are not entered into on a net basis.
The Europe Fund will enter into swaps only with banks and recognized
securities dealers believed by the Investment Manager to present minimal credit
risk in accordance with guidelines established by the Board of Directors of the
Investment Company. If there is a default by the approved counterparty to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the swap.
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DEBT SECURITIES
Under normal market conditions, the Balanced Fund will invest at least
25%, the International Fund may invest up to 20%, and each other Fund except the
Emerging Markets Fund may invest up to 10%, of its total assets in short-term
debt obligations (with maturities of one year or less) issued or guaranteed by
the U.S. government or foreign governments (including their respective agencies,
instrumentalities, authorities and political subdivisions), debt obligations
issued or guaranteed by international or supranational government entities, and
debt obligations of corporate issuers. The timing of purchase and sale
transactions in debt obligations may result in capital appreciation or
depreciation because the value of debt obligations varies inversely with
prevailing interest rates. The debt obligations in which each Fund may invest
will be rated, at the time of purchase, BBB or higher by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), or Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or equivalent ratings by
other rating organizations, or, if unrated, will be determined by the Investment
Manager to be of comparable investment quality. If the rating of an investment
grade security held by any Fund is downgraded, the Investment Manager will
determine whether it is in the best interests of the Fund to continue to hold
the security in its investment portfolio. Investment grade means the issuer of
the security is believed to have adequate capacity to pay interest and repay
principal, although certain of such securities in the lower grades have
speculative characteristics, and changes in economic conditions or other
circumstances may be more likely to lead to a weakened capacity to pay interest
and principal than would be the case with higher-rated securities. The
Investment Manager does not currently intend to purchase U.S. or foreign debt
securities on behalf of the International Fund except on an occasional basis
when the Investment Manager believes that unusually attractive investments are
available.
Although securities rated BBB by Standard & Poor's or Baa by Moody's
are considered to be of "investment grade," and are considered to have adequate
capacity to pay interest and repay principal, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and principal than higher-rated securities. Credit ratings evaluate the
safety of principal and interest payments of securities, not their market value.
The rating of an issuer is also heavily weighted by past developments and does
not necessarily reflect probable future conditions. There is frequently a lag
between the time a rating is assigned and the time it is updated.
The Emerging Markets Fund may invest up to 5% of its total assets in
debt securities issued or guaranteed by an emerging market company or government
(including such government's agencies, instrumentalities, authorities and
political subdivisions), or denominated in the currencies of emerging market
countries that the Investment Manager believes present attractive investment
opportunities for capital growth. There is no limit on the average maturity of
the debt securities in the Emerging Markets Fund's portfolio. Such debt
obligations may be unrated or rated, at the time of purchase, below investment
grade by Standard & Poor's, Moody's or another recognized international rating
organization. The Balanced Fund may invest up to 5% of its total assets in debt
securities rated, at the time of purchase, below investment grade by Standard
and Poor's, Moody's or another recognized international rating organization.
Bonds rated below investment grade are often referred to as "junk bonds," and
involve greater risk of default or price declines than investment grade
securities. The Balanced Fund will not invest in securities rated lower than B.
RATINGS. Credit ratings evaluate the safety of principal and interest
payments of securities, not their market value. The rating of an issuer is also
heavily weighted by past developments and does not necessarily reflect probable
future conditions. There is frequently a lag between the time a rating is
assigned and the time it is updated. As credit rating agencies may fail to
timely change credit ratings of securities to reflect subsequent events, the
Investment Manager will also monitor issuers of such securities to determine if
such issuers will have sufficient cash flow and profits to meet required
principal and interest payments and to assure their liquidity. In general, debt
securities held by a Fund will be treated as investment grade if they are rated
by at least one major rating agency in one of its top four rating categories at
the time of purchase or, if unrated, are determined by the Investment Manager to
be of comparable quality. Investment grade means the issuer of the security is
believed to have adequate capacity to pay interest and repay principal, although
certain of such securities in the lower grades have speculative characteristics,
and changes in economic conditions or other circumstances may be more likely to
lead to a weakened capacity to pay interest and principal than would be the case
with higher rated securities. If the rating of an investment grade security held
by a Fund is downgraded, the Investment Manager will determine whether it is in
the best interests of the Fund to continue to hold the security in its
investment portfolio. The Emerging Markets Fund and the Balanced Fund may invest
in debt
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securities rated, at the time of purchase, below investment grade. Refer to the
section entitled "Risk Considerations" for the risks associated with below
investment grade debt securities.
GOVERNMENT OBLIGATIONS. U.S. Government obligations include obligations
issued or guaranteed as to principal and interest by the U.S. Government and its
agencies and instrumentalities, by the right of the issuer to borrow from the
U.S. Treasury, by the discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality, or only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law.
Each Fund may invest in sovereign debt obligations of foreign
countries. A number of factors affect a sovereign debtor's willingness or
ability to repay principal and interest in a timely manner, including its cash
flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of
the debt service burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political constraints to which it
may be subject. Emerging market governments could default on their sovereign
debt. Such sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The commitments on the
part of these governments, agencies and others to make such disbursements may be
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to meet such conditions could result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debt in a timely
manner.
ZERO COUPON, PAY-IN-KIND AND STEP COUPON SECURITIES. The Balanced Fund
may invest in zero coupon, pay-in-kind and step coupon securities. Zero coupon
bonds are issued and traded at a discount from their face value. They do not
entitle the holder to any periodic payment of interest prior to maturity. Step
coupon bonds trade at a discount from their face value and pay coupon interest.
The coupon rate is low for an initial period and then increases to a higher
coupon rate. The discount from the face amount or par value depends on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. Pay-in-kind bonds
normally give the issuer an option to pay cash at a coupon payment date or
securities with a face value equal to the amount of the coupon payment that
would have been made.
Current federal income tax law requires holders of zero coupon
securities and step coupon securities to report the portion of the original
issue discount on such securities that accrues during a given year as interest
income, even though the holders receive no cash payments of interest during the
year. In order to qualify as a "regulated investment company" under the Internal
Revenue Code of 1986 and the regulations thereunder (the "Code"), the Fund must
distribute its investment company taxable income, including the original issue
discount accrued on zero coupon bonds or step coupon bonds. Because the Fund
will not receive cash payments on a current basis in respect of accrued
original-issue discount on zero coupon bonds or step coupon bonds during the
period before interest payments begin, in some years the Fund may have to
distribute cash obtained from other sources in order to satisfy the distribution
requirements under the Code. The Fund might obtain such cash from selling other
portfolio holdings, which might cause the Fund to incur capital gains or losses
on the sale. Additionally, these actions are likely to reduce the assets to
which Fund expenses could be allocated and to reduce the rate of return for the
Fund. In some circumstances, such sales might be necessary in order to satisfy
cash distribution requirements even though investment considerations might
otherwise make it undesirable for the Fund to sell the securities at the time.
Generally, the market prices of zero coupon, step coupon and
pay-in-kind securities are more volatile than the prices of securities that pay
interest periodically and in cash and are likely to respond to changes in
interest rates to a greater degree than other types of debt securities having
similar maturities and credit quality.
PASS THROUGH SECURITIES. The Balanced Fund may invest in various types
of pass-through securities, such as mortgage-backed securities, asset-backed
securities and participation interests. A pass-through security is a share or
certificate of interest in a pool of debt obligations that have been repackaged
by an intermediary, such as a
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bank or broker-dealer. The purchaser of a pass-through security receives an
undivided interest in the underlying pool of securities. The issuers of the
underlying securities make interest and principal payments to the intermediary
which are passed through to purchasers, such as the Fund. The most common type
of pass-through securities are mortgage-backed securities, including those
issued by the Government National Mortgage Association ("GNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), and the Federal National Mortgage
Association ("FNMA").
GNMA Certificates are mortgage-related securities that evidence an
undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrowers over the term of
the loan rather than returned in a lump sum at maturity. The Fund will generally
purchase "modified pass-through" GNMA Certificates, which entitle the holder to
receive a share of all interest and principal payments paid on the mortgage
pool, net of fees paid to the intermediary and GNMA, regardless of whether or
not the mortgagor actually makes the payment. GNMA Certificates are backed as to
the timely payment of principal and interest by the full faith and credit of the
U.S. Government.
FHLMC issues two types of mortgage pass-through securities: mortgage
participation securities ("PCs") and guaranteed mortgage securities ("GMCs").
PCs resemble GNMA Certificates in that each PC represents a pro rata share of
all interest and principal payments made on the underlying pool. FHLMC
guarantees timely payments of interest on PCs and the full return of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semiannually and return principal once a year in
guaranteed minimum payments. This type of security is guaranteed by FHLMC as to
timely payment principal and interest but it is not guaranteed by the full faith
and credit of the U.S. Government.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owned on the underlying pool. This type of security is guaranteed by
FNMA as to timely payment of principal and interest, but it is not guaranteed by
the full faith and credit of the U.S.
Government.
Except for GMCs, each of the mortgage-backed securities described above
is characterized by monthly payments to the holder, reflecting the monthly
payments made by the borrowers who received the underlying mortgage loans. The
payments to the security holders (such as the Fund), like the payments on the
underlying loans, represent both principal and interest. Pass-through securities
are subject to prepayment risk. Although the underlying mortgage loans are for
specified periods of time, such as 20 or 30 years, the borrowers can, and
typically do, pay them off sooner. Thus, the security holders frequently receive
prepayments of principal in addition to the principal that is part of the
regular monthly payments. A portfolio manager will consider estimated prepayment
rates in calculating the average weighted maturity of the Fund. A borrower is
more likely to prepay a mortgage that bears a relatively high rate of interest.
This means that in times of declining interest rates, higher yielding
mortgage-backed securities held by the Fund might be converted to cash and that
Fund will be forced to accept lower interest rates when that cash is used to
purchase additional securities in the mortgage-backed securities sector or in
other investment sectors. Additionally, prepayments during such periods will
limit the Fund's ability to participate in as large a market gain as may be
experienced with a comparable security not subject to prepayment.
MUNICIPAL SECURITIES. The Balanced Fund may invest in municipal
securities issued by states, territories and possessions of the United States
and the District of Columbia. The value of municipal obligations can be affected
by changes in their actual or perceived credit quality. The credit quality of
municipal obligations can be affected by, among other things, the financial
condition of the issuer or guarantor, the issuer's future borrowing plans and
sources of revenue, the economic feasibility of the revenue bond project or
general borrowing purpose, political or economic developments in the region
where the security is issued, and the liquidity of the security. Because
municipal securities are generally traded over-the-counter, the liquidity of a
particular issue often depends on the willingness of dealers to make a market in
the security. The liquidity of some municipal obligations may be enhanced by
demand features, which would enable the Fund to demand payment on short notice
from the issuer or a financial intermediary. Such securities must be rated at
least A by Standard & Poor's or Moody's.
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The Fund may purchase insured municipal debt in which scheduled
payments of interest and principal are guaranteed by a private, non-governmental
or governmental insurance company. The insurance does not guarantee the market
value of the municipal debt or the value of the shares of the Fund.
Securities of issuers of municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or imposing other constraints upon enforcement of such
obligations or upon the ability of municipalities to levy taxes. Furthermore, as
a result of legislation or other conditions, the power or ability of any issuer
to pay, when due, the principal of and interest on its municipal obligations may
be materially affected.
MORAL OBLIGATION SECURITIES. Municipal securities may include "moral
obligation" securities which are usually issued by special purpose public
authorities. If the issuer of moral obligation bonds cannot fulfill its
financial responsibilities from current revenues, it may draw upon a reserve
fund, the restoration of which is a moral commitment but not a legal obligation
of the state or municipality which created the issuer.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS. The Balanced Fund
may invest in tax exempt industrial development bonds and pollution control
bonds which, in most cases, are revenue bonds and generally are not payable from
the unrestricted revenues of an issuer. They are issued by or on behalf of
public authorities to raise money to finance privately operated facilities for
business, manufacturing, housing, sport complexes, and pollution control.
Consequently, the credit quality of these securities depend upon the ability of
the user of the facilities financed by the bonds and any guarantor to meet its
financial obligations.
MUNICIPAL LEASE OBLIGATIONS. The Balanced Fund may invest in lease
obligations or installment purchase contract obligations of municipal
authorities or entities ("municipal lease obligations"). Although lease
obligations do not constitute general obligations of the municipality for which
its taxing power is pledged, a lease obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payment due
under the lease obligation. The Fund may also purchase "certificates of
participation," which are securities issued by a particular municipality or
municipal authority to evidence a proportionate interest in base rental or lease
payments relating to a specific project to be made by the municipality, agency
or authority. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in any year unless money is appropriated for such
purpose for such year. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
default and foreclosure might prove difficult. In addition, these securities
represent a relatively new type of financing and certain lease obligations may
therefore be considered to be illiquid securities.
SHORT-TERM OBLIGATIONS. The Balanced Fund may invest in short-term
municipal obligations. These securities include the following:
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power of the municipality for
the payment of principal and interest when due.
Revenue Anticipation Notes are issued in expectation of receipt of
other kinds of revenue, such as federal revenues available under the Federal
Revenue Sharing Program. They also are usually general obligations of the
issuer.
Bond Anticipation Notes normally are issued to provide interim
financing until long-term financing can be arranged. The long-term bonds then
provide the money for the repayment of the notes.
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Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many such
projects receive permanent financing through FNMA or GNMA.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term
(365 days or less) promissory notes issued by municipalities to supplement their
cash flow.
MORTGAGE-BACKED SECURITIES The Balanced Fund may purchase
mortgage-backed securities issued by government and non-government entities such
as banks, mortgage lenders, or other financial institutions. A mortgage-backed
security may be an obligation of the issuer backed by a mortgage or pool of
mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations or CMOs,
make payments of both principal and interest at a variety of intervals; others
make semiannual interest payments at a predetermined rate and repay principal at
maturity (like a typical bond). Mortgage-backed securities are based on various
types of mortgages, including those on commercial real estate or residential
properties. Other types of mortgage-backed securities will likely be developed
in the future, and the Fund may invest in them if the Investment Manager
determines they are consistent with the Fund's investment objectives and
policies.
The value of a mortgage-backed security may change due to shifts in the
market's perceptions of the issuer. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Mortgage-backed
securities are subject to prepayment risk as described above under "Pass Through
Securities." Prepayment, which occurs when unscheduled or early payments are
made on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns. The Fund will invest in CMOs and
mortgage-backed securities only if the Investment Manager determines that they
are marketable.
FOREIGN MORTGAGE-RELATED SECURITIES. Foreign mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers domiciled in a foreign country. These include mortgage loans made by
trust and mortgage loan companies, credit unions, chartered banks, and others.
Pools of mortgage loans are assembled as securities for sale to investors by
various governmental, government-related and private organizations (e.g. Canada
Mortgage and Housing Corporation and First Australian National Mortgage
Acceptance Corporation Limited). The mechanics of these mortgage-related
securities are generally the same as those issued in the United States. However,
foreign mortgage markets may differ materially from the U.S. mortgage market
with respect to matters such as the sizes of loan pools, pre-payment experience,
and maturities of loans.
ASSET-BACKED SECURITIES The Balanced Fund may purchase asset-backed
securities, which include undivided fractional interests in pools of consumer
loans (unrelated to mortgage loans) held in a trust. Payments of principal and
interest are passed through to certificate holders and are typically supported
by some form of credit enhancement, such as a letter of credit, surety bonds or
limited guarantees. The degree of credit enhancement varies, but generally
amounts to only a fraction of the asset-backed security's par value until
exhausted. If the credit enhancement is exhausted, certificate holders may
experience losses or delays in payment if the required payments of principal and
interest are not made to the trust with respect to the underlying loans. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing the credit
enhancement. Asset-backed securities ultimately depend upon payment of consumer
loans by individuals, and the certificate holder generally has no recourse to
the entity that originated the loans. The underlying loans are subject to
prepayments which shorten the securities' weighted average life and may lower
their returns. (As prepayments flow through at par, total returns would be
affected by the prepayments; if a security were trading at a premium, its total
return would be lowered by prepayments, and if a security were trading at a
discount, its total return would be increased by prepayments.) The Fund will
invest in asset backed securities only if the Investment Manager determines that
they are marketable.
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OTHER INCOME-PRODUCING SECURITIES
Other types of income producing securities that the Balanced Fund may
purchase include, but are not limited to, the following types of securities:
VARIABLE OR FLOATING RATE OBLIGATIONS. These types of securities bear
variable or floating interest rates and carry rights that permit holders to
demand payment of the unpaid principal balance plus accrued interest from the
issuers of certain financial intermediaries. Floating rate instruments have
interest rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment in
the interest rate. These arrangements are designed to result in a market value
for the instrument that approximates its par value.
STANDBY COMMITMENTS. These instruments, which are similar to a put,
give the Fund the option to obligate a broker, dealer or bank to repurchase a
security held by the Fund at a specified price.
TENDER OPTION BONDS. Tender option bonds are relatively long-term bonds
that are coupled with the agreement of a third party (such as a broker, dealer,
or bank) to grant the holders of such securities the option to tender the
securities to the institution at periodic intervals.
INVERSE FLOATERS. Inverse floaters are debt instruments whose interest
bears an inverse relationship to the interest rate on another security or an
index.
The Fund will purchase standby commitments, tender option bonds,
inverse floaters and instruments with demand features primarily for the purpose
of increasing the liquidity of their portfolios.
INDEX AND CURRENCY-LINKED SECURITIES. The Fund may invest in
"index-linked" or "commodity-linked" notes, which are debt securities of
companies that call for interest payments and/or payment at maturity in
different terms than the typical note where the borrower agrees to make fixed
interest payments and to pay a fixed sum at maturity. Principal and/or interest
payments on an index-linked note depend on the performance of one or more market
indices, such as the S&P 500 Index or a weighted index of commodity futures such
as crude oil, gasoline and natural gas. The Fund may also invest in "equity
linked" and "currency-linked" debt securities. At maturity, the principal amount
of an equity-linked debt security is exchanged for common stock of the issuer or
is payable in an amount based on the issuer's common stock price at the time of
maturity. Currency-linked debt securities are short-term or intermediate term
instruments having a value at maturity, and/or an interest rate, determined by
reference to one or more foreign currencies. Payment of principal or periodic
interest may be calculated as a multiple of the movement of one currency against
another currency, or against an index.
Index floaters and index and currency-linked securities are derivative
instruments which may entail substantial risks. Such instruments may be subject
to significant price volatility. The company issuing the instrument may fail to
pay the amount due on maturity. The underlying investment or security may not
perform as expected by the Investment Manager. Markets, underlying securities
and indexes may move in a direction that was not anticipated by the Investment
Manager. Performance of the derivatives may be influenced by interest rate and
other market changes in the U.S. and abroad. Certain derivative instruments may
be illiquid.
CONVERTIBLE SECURITIES AND WARRANTS
Each Fund may invest in convertible securities and warrants. The value
of a convertible security is a function of its "investment value" (determined by
its yield in comparison with the yields of other securities of comparable
maturity and quality that do not have conversion privilege) and its "conversion
value" (the security's worth, at market value, if converted into the underlying
common stock). The credit standing of the issuer and other factors may also
affect the investment value of a convertible security. The conversion value of a
convertible security is determined by the market price of the underlying common
stock. If the conversion value is low relative to the investment value, the
price of the convertible security is governed principally by its investment
value. To the extent the market price of the underlying
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common stock approaches or exceeds the conversion price, the price of the
convertible security will be increasingly influenced by its conversion value.
As a matter of operating policy, no Fund will invest more than 5% of
its net assets in warrants. A warrant gives the holder a right to purchase at
any time during a specified period a predetermined number of shares of common
stock at a fixed price. Unlike convertible debt, securities or preferred stock,
warrants do not pay a fixed dividend. Investments in warrants involve certain
risks, including the possible lack of a liquid market for resale of the
warrants, potential price fluctuations as a result of speculation or other
factors, and failure of the price of the underlying security to reach or have
reasonable prospects of reaching a level at which the warrant can be prudently
exercised (in which event the warrant may expire without being exercised)
resulting in a loss of the Fund's entire investment therein.
SYNTHETIC CONVERTIBLE SECURITIES
Each Fund may invest in "synthetic" convertible securities, which are
derivative positions composed of two or more different securities whose
investment characteristics, taken together, resemble those of convertible
securities. For example, a Fund may purchase a non-convertible debt security and
a warrant or option, which enables a Fund to have a convertible-like position
with respect to a company, group of companies or stock index. Synthetic
convertible securities are typically offered by financial institutions and
investment banks in private placement transactions. Upon conversion, the Fund
generally receives an amount in cash equal to the difference between the
conversion price and the then current value of the underlying security. Unlike a
true convertible security, a synthetic convertible comprises two or more
separate securities, each with its own market value. Therefore, the market value
of a synthetic convertible is the sum of the values of its fixed-income
component and its convertible component. For this reason, the values of a
synthetic convertible and a true convertible security may respond differently to
market fluctuations. A Fund only invests in synthetic convertibles with respect
to companies whose corporate debt securities are rated "A" or higher by Moody's
or Standard & Poor's and will not invest more than 15% of its net assets in such
synthetic securities and other illiquid securities.
PREFERRED STOCK
Each Fund may purchase preferred stock. Preferred stock, unlike common
stock, offers a stated dividend rate payable from a corporation's earnings. Such
preferred stock dividends may be cumulative or non-cumulative, participating, or
auction rate. If interest rates rise, the fixed dividend on preferred stocks may
be less attractive, causing the price of preferred stocks to decline. Preferred
stock may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates decline.
Dividends on some preferred stock may be "cumulative," requiring all or a
portion of prior unpaid dividends to be paid prior to payment of dividends on
the issuer's common stock. Preferred stock also generally has a preference over
common stock on the distribution of a corporation's assets in the event of
liquidation of the corporation, and may be "participating," which means that it
may be entitled to a dividend exceeding the stated dividend in certain cases.
The rights of the holders of preferred stock on the distribution of a
corporation's assets in the event of a liquidation are generally subordinate to
the rights associated with a corporation's debt securities.
BORROWING MONEY
From time to time, it may be advantageous for a Fund to borrow money
rather than sell portfolio securities to raise the cash to meet redemption
requests. In order to meet such redemption requests, each Fund may borrow from
banks or enter into reverse repurchase agreements. Each Fund may also borrow up
to 5% of the value of its total assets for temporary or emergency purposes other
than to meet redemptions. However, the Funds will not borrow money for
leveraging purposes. A Fund may continue to purchase securities while borrowings
are outstanding. The 1940 Act permits a Fund to borrow only from banks and only
to the extent that the value of its total assets, less its liabilities other
than borrowings, is equal to at least 300% of all borrowings (including the
proposed borrowing), and requires the Fund to take prompt action to reduce its
borrowings if this limit is exceeded. For the purpose of the 300% borrowing
limitation, reverse repurchase transactions are considered to be borrowings
(except for the Europe Fund).
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A reverse repurchase agreement involves a transaction by which a
borrower (such as a Fund) sells a security to a purchaser (a member bank of the
Federal Reserve System or a broker-dealer deemed creditworthy pursuant to
standards adopted by the Board of Directors of the Capital Company, the Global
Company or the Investment Company, as applicable (each, a "Board of Directors"
or collectively, the "Boards of Directors"), and simultaneously agrees to
repurchase the security at an agreed-upon price on an agreed-upon date within a
number of days (usually not more than seven) from the date of purchase.
"ROLL" TRANSACTIONS
The Balanced Fund may enter into "roll" transactions, which are the
sale of GNMA certificates and other securities together with a commitment to
purchase similar, but not identical, securities at a later date from the same
party. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase, as well as by the
interest earned on the cash proceeds of the initial sale. Like when-issued
securities or firm commitments, roll transactions involve the risk that the
market value of the securities sold by the Fund may decline below the price at
which the Fund is committed to purchase similar securities. Additionally, in the
event the buyer of securities under a roll transaction files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the transactions may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
The Fund will engage in roll transactions for the purpose of acquiring
securities for its portfolio consistent with its investment objective and
policies and not for investment leverage. Nonetheless, roll transactions are
speculative techniques and are considered to be the economic equivalent of
borrowings by the Fund. To avoid leverage, the Fund will establish a segregated
account with its Custodian in which it will maintain liquid assets in an amount
sufficient to meet its payment obligations with respect to these transactions.
The Fund will not enter into roll transactions if, as a result, more than 50% of
the Fund's net assets would be segregated to cover such contracts.
LENDING PORTFOLIO SECURITIES
Each Fund is authorized to make loans of portfolio securities, for the
purpose of realizing additional income, to broker-dealers or other institutional
investors deemed creditworthy pursuant to standards adopted by its Board of
Directors. The borrower must maintain with the Fund's custodian collateral
consisting of cash, U.S. Government securities or other liquid debt or equity
securities equal to at least 100% of the value of the borrowed securities, plus
any accrued interest. The Fund will receive any interest paid on the loaned
securities, and a fee and/or a portion of the interest earned on the collateral,
less any fees and administrative expenses associated with the loan.
INVESTMENT IN ILLIQUID SECURITIES
Each Fund may invest up to 15% (10% for the International Fund) of the
value of its net assets in illiquid securities. Securities may be considered
illiquid if a Fund cannot reasonably expect to receive approximately the amount
at which the Fund values such securities within seven days. The Investment
Manager has the authority to determine whether certain securities held by a Fund
are liquid or illiquid pursuant to standards adopted by the Boards of Directors.
The Investment Manager takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: the listing of the
security on an exchange or national market system; the frequency of trading in
the security; the number of dealers who publish quotes for the security; the
number of dealers who serve as market makers for the security; the apparent
number of other potential purchasers; and the nature of the security and how
trading is effected (e.g., the time needed to sell the security, how offers are
solicited, and the mechanics of transfer).
The Funds' investments in illiquid securities may include securities
that are not registered for resale under the Securities Act of 1933 (the
"Securities Act"), and therefore are subject to restrictions on resale. When a
Fund purchases unregistered securities, it may, in appropriate circumstances,
obtain the right to register such securities at the expense
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of the issuer. In such cases there may be a lapse of time between the Fund's
decision to sell any such security and the registration of the security
permitting sale. During any such period, the price of the security will be
subject to market fluctuations.
The fact that there are contractual or legal restrictions on resale of
certain securities to the general public or to certain institutions may not be
indicative of the liquidity of such investments. If such securities are subject
to purchase by institutional buyers in accordance with Rule 144A under the
Securities Act, the Investment Manager may determine in particular cases,
pursuant to standards adopted by the Boards of Directors, that such securities
are not illiquid securities notwithstanding the legal or contractual
restrictions on their resale. Investing in Rule 144A securities could have the
effect of increasing a Fund's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing such
securities.
CASH-EQUIVALENT INSTRUMENTS
Other than as described under INVESTMENT RESTRICTIONS below, the Funds
are not restricted with regard to the types of cash-equivalent investments they
may make. When the Investment Manager believes that such investments are an
appropriate part of a Fund's overall investment strategy, the Fund may hold or
invest, for investment purposes, a portion of its assets in any of the
following, denominated in U.S. dollars, foreign currencies, or multinational
currencies: cash; short-term U.S. or foreign government securities; commercial
paper rated at least A-2 by Standard & Poor's or P-2 by Moody's certificates of
deposit or other deposits of banks deemed creditworthy by the Investment Manager
pursuant to standards adopted by each Company's Board of Directors; time
deposits; bankers' acceptances; and repurchase agreements related to any of the
foregoing. In addition, for temporary defensive purposes under abnormal market
or economic conditions, a Fund may invest up to 100% of its assets in such
cash-equivalent investments.
A certificate of deposit is a short-term obligation of a commercial
bank. A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with international commercial transactions. A
repurchase agreement involves a transaction by which an investor (such as a
Fund) purchases a security and simultaneously obtains the commitment of the
seller (a member bank of the Federal Reserve System or a securities dealer
deemed creditworthy by the Investment Manager pursuant to standards adopted by
the Board of Directors) to repurchase the security at an agreed-upon price on an
agreed-upon date within a number of days (usually not more than seven) from the
date of purchase.
PORTFOLIO TURNOVER
Securities in a Fund's portfolio will be sold whenever the Investment
Manager believes it is appropriate to do so, regardless of the length of time
that securities have been held, and securities may be purchased or sold for
short-term profits whenever the Investment Manager believes it is appropriate or
desirable to do so. Turnover will be influenced by sound investment practices, a
Fund's investment objective, and the need for funds for the redemption of a
Fund's shares, although the Tax Managed Growth Fund will also be influenced by
its strategy of holding securities long enough to avoid higher, short-term
capital gains taxes, selling shares with a higher cost basis first, and
offsetting gains realized in one security by selling another security at a
capital loss. In an attempt to minimize capital gains on other holdings, the Tax
Managed Growth Fund may also realize accrued losses on some stocks.
For example, a 150% portfolio turnover rate would occur if the value of
purchases or sales of portfolio securities (whichever is less) by a Fund for a
year (excluding purchases of U.S. Treasury issues and securities with a maturity
of one year or less) were equal to 150% of the average monthly value of the
securities held by the Fund during such year. As a result of the manner in which
turnover is measured, a high turnover rate could also occur during the first
year of a Fund's operations, and during periods when a Fund's assets are growing
or shrinking. A high portfolio turnover rate would increase a Fund's brokerage
commission expenses and other transaction costs, and may increase its taxable
capital gains.
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RISK CONSIDERATIONS
INVESTMENTS IN FOREIGN SECURITIES GENERALLY
Investments in foreign securities may offer investment opportunities
and potential benefits not available from investments solely in securities of
U.S. issuers. Such benefits may include higher rates of interest on debt
securities than are available from domestic issuers, the opportunity to invest
in foreign issuers that appear, in the opinion of the Investment Manager, to
offer better opportunity for long-term capital appreciation than investments in
securities of U.S. issuers, the opportunity to invest in foreign countries with
economic policies or business cycles different from those of the United States
and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign markets that do not necessarily move in a manner parallel
to U.S. stock markets.
At the same time, however, investing in foreign securities involves
significant risks, some of which are not typically associated with investing in
securities of U.S. issuers. For example, the value of investments in such
securities may fluctuate based on changes in the value of one or more foreign
currencies relative to the U.S. dollar, and a change in the exchange rate of one
or more foreign currencies could reduce the value of certain portfolio
securities. Currency exchange rates may fluctuate significantly over short
periods of time, and are generally determined by the forces of supply and demand
and other factors beyond a Fund's control. Changes in currency exchange rates
may, in some circumstances, have a greater effect on the market value of a
security than changes in the market price of the security. To the extent that a
substantial portion of a Fund's total assets is denominated or quoted in the
currency of a foreign country, the Fund will be more susceptible to the risk of
adverse economic and political developments within that country. As discussed
above, each Fund may employ certain investment techniques to hedge its foreign
currency exposure; however, such techniques also entail certain risks.
In addition, information about foreign issuers may be less readily
available than information about domestic issuers. Foreign issuers generally are
not subject to accounting, auditing, and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
U.S. issuers. Furthermore, with respect to certain foreign countries, the
possibility exists of expropriation, nationalization, revaluation of currencies,
confiscatory taxation, and limitations on foreign investment and the use or
removal of funds or other assets of a Fund, including the withholding of tax on
interest, dividends and other distributions and limitations on the repatriation
of currencies. In addition, a Fund may experience difficulties or delays in
obtaining or enforcing judgments. Foreign securities may be subject to foreign
government taxes that could reduce the yield and total return on such
securities.
Foreign equity securities may be traded on an exchange in the issuer's
country, an exchange in another country, or over-the-counter in one or more
countries. Most foreign securities markets, including over-the-counter markets,
have substantially less volume than U.S. securities markets, and the securities
of many foreign issuers may be less liquid and more volatile than securities of
comparable U.S. issuers. In addition, there is generally less government
regulation of securities markets, securities exchanges, securities dealers, and
listed and unlisted companies in foreign countries than in the United States.
Foreign markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct and complete such transactions. Inability to dispose of a
portfolio security caused by settlement problems could result either in losses
to a Fund due to subsequent declines in the value of the portfolio security or,
if a Fund has entered into a contract to sell that security, could result in
possible liability of the Fund to the purchaser. Delays in settlement could
adversely affect a Fund's ability to implement its investment strategies and to
achieve its investment objectives.
In addition, the costs associated with transactions in securities
traded on foreign markets or of foreign issuers, and the expense of maintaining
custody of such securities with foreign custodians, generally are higher than
the costs associated with transactions in U.S. securities on U.S. markets.
Investments in foreign securities may result in higher expenses due to the cost
of converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions
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on foreign exchanges, the expense of maintaining securities with foreign
custodians and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
Investment in debt securities of supranational organizations involves
additional risks. Such organizations' debt securities generally are not
guaranteed by their member governments, and payment depends on their financial
solvency and/or the willingness and ability of their member governments to
support their obligations. Continued support of a supranational organization by
its government members is subject to a variety of political, economic and other
factors, as well as the financial performance of the organization.
DEPOSITARY RECEIPTS
In many respects, the risks associated with investing in depositary
receipts are similar to the risks associated with investing in foreign equity
securities directly. Therefore, for purposes of each Fund's investment policies
and restrictions, they are treated as foreign equity securities, based on the
country in which the underlying issuer is organized or headquartered. In
addition, to the extent that a Fund acquires depositary receipts through banks
that do not have a contractual relationship with the foreign issuer of the
security underlying the depositary receipts to issue and service depositary
receipts, there may be an increased possibility that the Fund would not become
aware of and be able to respond to corporate actions, such as stock splits or
rights offerings, involving the foreign issuer in a timely manner.
The information available for American Depositary Receipts ("ADRs")
sponsored by the issuers of the underlying securities is subject to the
accounting, auditing, and financial reporting standards of the domestic market
or exchange on which they are traded, which standards generally are more uniform
and more exacting than those to which many non-domestic issuers may be subject.
However, some ADRs are sponsored by persons other than the issuers of the
underlying securities. Issuers of the stock on which such ADRs are based are not
obligated to disclose material information in the United States. The information
that is available concerning the issuers of the securities underlying European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") may be less
than the information that is available about domestic issuers, and EDRs and GDRs
may be traded in markets or on exchanges that have lesser standards than those
applicable to the markets for ADRs.
A depositary receipt will be treated as an illiquid security for
purposes of a Fund's restriction on the purchases of such securities unless the
depositary receipt is convertible into cash by the Fund within seven days.
EMERGING MARKET SECURITIES
There are special risks associated with investments in securities of
companies organized or headquartered in developing countries with emerging
markets that are in addition to the usual risks of investing in securities of
issuers located in developed foreign markets around the world, and investors in
the Funds are strongly advised to consider those risks carefully. The securities
markets of emerging market countries are substantially smaller, less developed,
less liquid, and more volatile than the securities markets of the United States
and developed foreign markets. As a result, the prices of emerging market
securities may increase or decrease much more rapidly and much more dramatically
than the prices of securities of issuers located in developed foreign markets.
Disclosure and regulatory standards in many respects are less stringent than in
the United States and developed foreign markets. There also may be a lower level
of monitoring and regulation of securities markets in emerging market countries
and the activities of investors in such markets, and enforcement of existing
regulations has been extremely limited.
Many emerging market countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have very
negative effects on the economies and securities markets of certain emerging
market countries. Economies in emerging markets generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
affected adversely by trade barriers, exchange controls, managed adjustments in
relative currency values, and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries with
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which they trade. In addition, custodial services and other costs related to
investment in foreign markets may be more expensive in emerging markets than in
many developed foreign markets, which could reduce the Funds' investment returns
from such securities.
In many cases, governments of emerging market countries continue to
exercise a significant degree of control over the economies of such countries,
and government actions relative to the economy, as well as economic developments
generally, also may have a major effect on an issuer's prospects. In addition,
certain of such governments have in the past failed to recognize private
property rights and have at times naturalized or expropriated the assets of
private companies. There is also a heightened possibility of confiscatory
taxation, imposition of withholding taxes on dividend and interest payments, or
other similar developments that could affect investments in those countries. As
a result, there can be no assurance that adverse political changes will not
cause a Fund to suffer a loss with respect to any of its holdings. In addition,
political and economic structures in many of such countries may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristics of more developed
countries. Unanticipated political or social developments may affect the values
of a Fund's investments in those countries and the availability of additional
investments in those countries.
INVESTMENTS IN SMALLER COMPANIES
Investment in the securities of companies with smaller market
capitalizations involves greater risk and the possibility of greater portfolio
price volatility than investing in larger capitalization companies. The
securities of small-sized concerns, as a class, have shown market behavior which
has had periods of more favorable results, and periods of less favorable
results, relative to securities of larger companies as a class. For example,
smaller capitalization companies may have less certain growth prospects, and may
be more sensitive to changing economic conditions, than large, more established
companies. Moreover, smaller capitalization companies often face competition
from larger or more established companies that have greater resources. In
addition, the smaller capitalization companies in which a Fund may invest may
have limited or unprofitable operating histories, limited financial resources,
and inexperienced management. Furthermore, securities of such companies are
often less liquid than securities of larger companies, and may be subject to
erratic or abrupt price movements. To dispose of these securities, a Fund may
have to sell them over an extended period of time below the original purchase
price. Investments in smaller capitalization companies may be regarded as
speculative.
Securities issued by companies (including predecessors) that have
operated for less than three years may have limited liquidity, which can result
in their prices being lower than might otherwise be the case. In addition,
investments in such companies are more speculative and entail greater risk than
do investments in companies with established operating records.
CONVERTIBLE SECURITIES
Investment in convertible securities involves certain risks. The value
of a convertible security is a function of its "investment value" (determined by
its yield in comparison with the yields of other securities of comparable
maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying stock). If the conversion value is low relative to the investment
value, the price of the convertible security will be governed principally by its
yield, and thus may not decline in price to the same extent as the underlying
stock; to the extent the market price of the underlying common stock approaches
or exceeds the conversion price, the price of the convertible security will be
influenced increasingly by its conversion value. A convertible security held by
a Fund may be subject to redemption at the option of the issuer at a price
established in the instrument governing the convertible security, in which event
the Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock, or sell it to a third party.
BELOW INVESTMENT GRADE DEBT SECURITIES
The Emerging Markets Fund and the Balanced Fund may invest up to 5% of
their total assets in debt securities rated below "Baa" by Moody's, below "BBB"
by Standard & Poor's, or investment grade by another recognized rating
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agency or, if unrated, judged by the Investment Manager to be of comparable
quality, if the Investment Manager believes that the financial condition of the
issuer or the protection afforded to the particular securities is stronger than
would otherwise be indicated by such low ratings or the lack thereof. Debt
securities rated below investment grade or equivalent ratings, commonly referred
to as "junk bonds," are subject to greater risk of loss of income and principal
than higher-rated bonds and are considered to be predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal, which may
in any case decline during sustained periods of deteriorating economic
conditions or rising interest rates. Junk bonds are generally considered to be
subject to greater market risk in times of deteriorating economic conditions,
and to wider market and yield fluctuations, than higher-rated securities. Junk
bonds may also be more susceptible to real or perceived adverse economic and
competitive industry conditions than investment grade securities. The market for
such securities may be thinner and less active than that for higher-rated
securities, which can adversely affect the prices at which these securities can
be sold. To the extent that there is no established secondary market for
lower-rated securities, a Fund may experience difficulty in valuing such
securities and, in turn, its assets. In addition, adverse publicity and investor
perceptions about junk bonds, whether or not based on fundamental analysis, may
tend to decrease the market value and liquidity of such securities. The
Investment Manager will try to reduce the risk inherent in a Fund's investments
in such securities through credit analysis, diversification and attention to
current developments and trends in interest rates and economic conditions.
However, there can be no assurance that losses will not occur. Since the risk of
default is higher for lower-rated bonds, the Investment Manager's research and
credit analysis are a correspondingly more important aspect of its program for
managing a Fund's investments in such debt securities. The Investment Manager
will attempt to identify those issuers of high-yielding securities whose
financial conditions are adequate to meet future obligations, or have improved
or are expected to improve in the future.
Credit ratings evaluate the safety of principal and interest payments
of securities, not their market value. The rating of an issuer is also heavily
weighted by past developments and does not necessarily reflect probable future
conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. As credit rating agencies may fail to timely change
credit ratings of securities to reflect subsequent events, the Investment
Manager will also monitor issuers of such securities to determine if such
issuers will have sufficient cash flow and profits to meet required principal
and interest payments and to assure their liquidity.
DELAYED-DELIVERY TRANSACTIONS
Each of the Funds (other than the Europe Fund) may buy and sell
securities on a delayed-delivery or when-issued basis. These transactions
involve a commitment by a Fund to purchase or sell specific securities at a
predetermined price and/or yield, with payment and delivery taking place after
the customary settlement period for that type of security (and more than seven
days in the future). Typically, no interest accrues to the purchaser until the
security is delivered. A Fund may receive fees for entering into
delayed-delivery transactions. When purchasing securities on a delayed-delivery
basis, a Fund assumes the rights and risks of ownership, including the risk of
price and yield fluctuations. Because a Fund is not required to pay for
securities until the delivery date, these risks are in addition to the risks
associated with the Fund's other investments. If a Fund remains substantially
fully invested at a time when delayed-delivery purchases are outstanding, the
delayed-delivery purchases may result in a form of leverage. When
delayed-delivery purchases are outstanding, a Fund will set aside appropriate
liquid assets in a segregated custodial account to cover its purchase
obligations. When a Fund has sold a security on a delayed-delivery basis, the
Fund does not participate in further gains or losses with respect to the
security. If the other party to a delayed-delivery transaction fails to deliver
or pay for the securities, the Fund could miss a favorable price or yield
opportunity, or could suffer a loss. A Fund may dispose of or renegotiate
delayed-delivery transactions after they are entered into, and may sell
underlying securities before they are delivered, which may result in capital
gains or losses.
OPTIONS
There are several risks associated with transactions in options on
securities, currencies and financial indices. Options may be more volatile than
the underlying instruments, and therefore, on a percentage basis, an investment
in options may be subject to greater fluctuation than an investment in the
underlying instruments themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation
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between these markets, causing a given transaction not to achieve its objective.
In addition, a liquid secondary market for particular options may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying instruments; unusual or unforeseen circumstances may
interrupt normal operations on an exchange; the facilities of an exchange or
clearing corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide,
or be compelled at some future date, to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in U.S. option exchanges will not be
available. For example, there may be no daily price fluctuation limits in such
exchanges or markets, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the purchaser of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost.
Potential losses to the writer of an option are not limited to the loss
of the option premium received by the writer, and thus may be greater than the
losses incurred in connection with the purchasing of an option.
FUTURES TRANSACTIONS
There are several risks in connection with the use of futures contracts
in the Funds. One risk arises because the correlation between movements in the
price of a futures contract and movements in the price of the security or
currency which is the subject of the hedge is not always perfect. The price of
the futures contract acquired by a Fund may move more than, or less than, the
price of the security or currency being hedged. If the price of the future moves
less than the price of the security or currency which is the subject of the
hedge, the hedge will not be fully effective but, if the price of the security
or currency being hedged has moved in an unfavorable direction, the Fund would
be in a better position than if it had not hedged at all. If the price of the
security or currency being hedged has moved in a favorable direction, this
advantage will be partially offset by movement in the value of the future. If
the price of the futures contract moves more than the price of the security or
currency, the Fund will experience either a loss or a gain on the futures
contract which will not be completely offset by movements in the price of the
security or currency which is the subject of the hedge.
To compensate for the imperfect correlation of movements in the price
of a security or currency being hedged and movements in the price of the
futures, a Fund may buy or sell futures contracts in a greater dollar amount
than the dollar amount of the security or currency being hedged, if the
historical volatility of the price of such security or currency has been greater
than the historical volatility of the security or currency. Conversely, a Fund
may buy or sell fewer futures contracts if the historical volatility of the
price of the security or currency being hedged is less than the historical
volatility of the security or currency.
Because of the low margins required, futures trading involves a high
degree of leverage. As a result, a relatively small investment in a futures
contract by a Fund may result in immediate and substantial loss, or gain, to the
Fund. A purchase or sale of a futures contract may result in losses in excess of
the initial margin for the futures contract. However, the Fund would have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold the instrument after the
decline.
When futures are purchased by a Fund to hedge against a possible
unfavorable movement in a currency exchange rate before the Fund is able to
invest its cash (or cash equivalents) in stock or debt instruments in an orderly
fashion, it is possible that the currency exchange rate may move in a favorable
manner instead. If the Fund then
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decides not to invest in stock or debt instruments at that time because of
concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
security or currency which is the subject of a hedge, the price of futures
contracts may not correlate perfectly with movements in the index or currency
due to certain market distortions. First, all participants in the futures market
are subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through offsetting transactions. This practice could distort the normal
relationship between the index or currency and futures markets. Second, from the
point of view of speculators, the deposit requirements in the futures market may
be less onerous than margin requirements in the security or currency market.
Therefore, increased participation by speculators in the futures market also may
cause temporary price distortions. Due to the possibility of price distortion in
the futures market and because of the imperfect correlation between movements in
the index or currency and movements in the price of index or currency futures, a
correct forecast of general market or currency trends by the Investment Manager
still may not result in a successful hedging transaction over a short time
frame.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. Once the daily
limit has been reached, no more trades may be made on that day at a price beyond
the limit. The daily limit governs only price movements during a particular
trading day and therefore does not limit potential losses, because the limit may
prevent the liquidation of unfavorable positions.
Compared to the use of a futures contract, the purchase of an option on
a futures contract involves less potential risk to a Fund because the maximum
amount at risk is the premium paid for the option (plus transaction costs).
However, there may be circumstances when the use of an option on a futures
contract would result in loss to a Fund when the use of a futures contract would
not, such as when there is no movement in the level of an index. In addition,
daily changes in the value of the option due to changes in the value of the
underlying futures contract are reflected in the net asset value of the Fund.
A Fund will only enter into futures contracts or purchase futures
options that are standardized and traded on a U.S. or foreign exchange or board
of trade, or similar entity, or quoted on an automated quotation system.
However, there is no assurance that a liquid secondary market on an exchange or
board of trade will exist for any particular futures contract or futures option
or at any particular time. In such event, it may not be possible to close a
futures position, and, in the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin. In the
event futures contracts have been used to hedge a portfolio security or
currency, an increase in the price of the security or currency, if any, may
partially or completely offset losses on the futures contract. However, as
described above, there is no guarantee that the price of the security or
currency will, in fact, correlate with the movements in the futures contract and
thus provide an offset to losses on a futures contract.
Successful use of futures by the Funds is subject to the Investment
Manager's ability to predict correctly movements in the direction of the
security and currency markets. For example, if a Fund hedged against the
possibility of a decline in the market adversely affecting stocks held in its
portfolio and stock prices increased instead, the Fund would lose part or all of
the benefit of the increased value of its stocks which it hedged because it
would have offsetting losses in its futures positions. In addition, in such
situations, if a Fund had insufficient cash, it might have to sell securities to
meet daily variation margin requirements. Such sales of securities might, but
would not necessarily be at increased prices which would reflect the rising
market. Similarly, if a Fund purchased currency futures contracts with the
intention of profiting from a favorable change in currency exchange rates, and
the change was unfavorable, the Fund would incur a loss, and might have to sell
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The Investment Manager and its predecessor have
been actively engaged in the provision of investment supervisory services for
institutional and individual accounts since 1970, but the skills required for
the successful use of futures and options on futures are different from those
needed to select portfolio securities, and the Investment Manager has limited
prior experience in the use of futures or options techniques in the management
of assets under its supervision.
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OTHER RISK CONSIDERATIONS
Investment in illiquid securities involves potential delays on resale
as well as uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities, and a Fund might not be
able to dispose of such securities promptly or at reasonable prices.
A number of transactions in which the Funds may engage are subject to
the risks of default by the other party to the transaction. If the seller of
securities pursuant to a repurchase agreement entered into by a Fund defaults
and the value of the collateral securing the repurchase agreement declines, the
Fund may incur a loss. If bankruptcy proceedings are commenced with respect to
the seller, realization of the collateral by the Fund may be delayed or limited.
Similarly, when a Fund engages in when-issued, reverse repurchase, forward
commitment and related settlement transactions, it relies on the other party to
consummate the trade; failure of the other party to do so may result in the Fund
incurring a loss or missing an opportunity to obtain a price the Investment
Manager believed to be advantageous. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of a possible delay in
receiving additional collateral or in recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially.
Borrowing also involves special risk considerations. Interest costs of
borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the return earned on the borrowed funds (or on the
assets that were retained rather than sold to meet the needs for which funds
were borrowed). Under adverse market conditions, a Fund might have to sell
portfolio securities to meet interest or principal payments at a time when
fundamental investment considerations would not favor such sales. To the extent
a Fund enters into reverse repurchase agreements, the Fund is subject to risks
that are similar to those of borrowing.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
Each Fund has adopted certain investment restrictions that are
fundamental policies and that may not be changed without approval by the vote of
a majority of the Fund's outstanding voting securities, as defined in the 1940
Act. The "vote of a majority of the outstanding voting securities" of the Fund,
as defined in Section 2(a)(42) of the 1940 Act, means the vote of (i) 67% or
more of the voting securities of the Fund present at any meeting, if the holders
of more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund, whichever is less. In the case of the Funds other than the Europe
Fund, these restrictions provide that a Fund may not:
1. Invest more than 25% of the value of its total assets in the securities
of companies primarily engaged in any one industry (other than the
United States of America, its agencies and instrumentalities) (this
restriction does not apply to the Global Technology Fund, Global Health
Care Fund, Biotechnology Fund or International Fund).
2. Acquire more than 10% of the outstanding voting securities of any one
issuer.
3. Invest in companies for the purpose of exercising control or
management.
4. Borrow money, except from banks to meet redemption requests or for
temporary or emergency purposes; provided that borrowings for temporary
or emergency purposes other than to meet redemption requests shall not
exceed 5% of the value of its total assets; and provided further that
total borrowings shall be made only to the extent that the value of the
Fund's total assets, less its liabilities other than borrowings, is
equal to at least 300% of all borrowings (including the proposed
borrowing). For purposes of the foregoing limitations, reverse
repurchase agreements and other borrowing transactions covered by
segregated assets are considered to be borrowings. A Fund will not
mortgage, pledge, hypothecate, or in any other manner transfer as
security for an indebtedness any of its assets. This investment
restriction shall not prohibit a Fund from engaging in futures
Page 28
<PAGE>
contracts, options on futures contracts, forward foreign currency
exchange transactions, and currency options.
5. Purchase securities on margin, but it may obtain such short-term credit
from banks as may be necessary for the clearance of purchases and sales
of securities.
6. Make loans of its funds or assets to any other person, which shall not
be considered as including: (i) the purchase of a portion of an issue
of publicly distributed debt securities, (ii) the purchase of bank
obligations such as certificates of deposit, bankers' acceptances and
other short-term debt obligations, (iii) entering into repurchase
agreements with respect to commercial paper, certificates of deposit
and obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, and (iv) the loan of portfolio
securities to brokers, dealers and other financial institutions where
such loan is callable by the Fund at any time on reasonable notice and
is fully secured by collateral in the form of cash or cash equivalents.
A Fund will not enter into repurchase agreements with maturities in
excess of seven days if immediately after and as a result of such
transaction the value of the Fund's holdings of such repurchase
agreements exceeds 10% (15%, in the case of the Tax Managed Growth
Fund) of the value of the Fund's total assets.
7. Act as an underwriter of securities issued by other persons, except
insofar as it may be deemed an underwriter under the Securities Act of
1933 in selling portfolio securities.
8. Invest more than 15% (10% for the International Fund) of the value of
its net assets in securities that are illiquid (this restriction does
not apply to the Balanced Fund, which is subject to a similar
non-fundamental restriction.);
9. Purchase the securities of any other investment company or investment
trust, except by purchase in the open market where, to the best
information of the Company, no commission or profit to a sponsor or
dealer (other than the customary broker's commission) results from such
purchase and such purchase does not result in such securities exceeding
10% of the value of the Fund's total assets, or except when such
purchase is part of a merger, consolidation, acquisition of assets, or
other reorganization approved by the Fund's stockholders.
10. Purchase portfolio securities from or sell portfolio securities to the
officers, directors, or other "interested persons" (as defined in the
1940 Act) of the Company, other than unaffiliated broker-dealers.
11. Purchase commodities or commodity contracts, except that the Fund may
purchase securities of an issuer which invests or deals in commodities
or commodity contracts, and except that the Fund may enter into futures
and options contracts in accordance with the applicable rules of the
CFTC.
12. Purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of "margin" deposits on the Fund's
existing futures positions and premiums paid for related options
entered into for the purpose of seeking to increase total return would
exceed 5% of the market value of the Fund's net assets (this
restriction applies to the International Fund only);
13. Issue senior securities, except that the Fund may borrow money as
permitted by restriction 4 above. This restriction shall not prohibit
the Fund from engaging in short sales, options, futures and foreign
currency transactions.
14. Purchase or sell real estate; provided that the Fund may invest in
readily marketable securities secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein.
IN THE CASE OF THE EUROPE FUND, THESE RESTRICTIONS PROVIDE THAT THE
FUND MAY NOT:
1. Purchase any security (other than obligations of the Federal Republic
of Germany, the German Federal Railways and the German Federal Post
Office, which in the aggregate shall not represent more than 25% or
Page 29
<PAGE>
more of the Fund's total assets, or obligations of the U.S. government,
its agencies or instrumentalities) if as a result more than 10% of the
Fund's total assets would then be invested in securities of any single
issuer.
2. Invest 25% or more of the value of its total assets in a particular
industry. This restriction does not apply to securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
but will apply to foreign government obligations until such time as the
Securities and Exchange Commission permits their exclusion.
3. Purchase more than 10% of the outstanding voting securities of any
issuer.
4. Borrow money, except from banks to meet redemption requests or for
temporary or emergency purposes; provided that borrowings for temporary
or emergency purposes other than to meet redemption requests shall not
exceed 5% of the value of its total assets; and provided further that
total borrowings shall be made only to the extent that the value of the
Fund's total assets, less its liabilities other than borrowings, is
equal to at least 300% of all borrowings (including the proposed
borrowing). For purposes of the foregoing limitations, reverse
repurchase agreements and other borrowing transactions covered by
segregated assets are not considered to be borrowings. The Fund will
not mortgage, pledge, hypothecate, or in any other manner transfer as
security for an indebtedness any of its assets. This investment
restriction shall not prohibit the Fund from engaging in futures
contracts, options on futures contracts, forward foreign currency
exchange transactions, and currency options.
5. Purchase or sell real estate or real estate mortgage loans, except that
the Fund may purchase and sell securities of companies that deal in
real estate or interests therein.
6. Purchase securities on margin, except short-term credits as may be
necessary or routine for the clearance or settlement of transactions,
and except for margin posted in connection with hedging transactions
consistent with its investment policies.
7. Underwrite securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the U.S. Securities Act of 1933 in
selling portfolio securities.
8. Buy or sell commodities, commodity contracts or futures contracts
(other than futures contracts with respect to foreign stock or bond
indices or other financial indices that the Investment Manager
determines are appropriate to hedge the risks associated with interest
rates or general fluctuations in the value of its portfolio
securities).
OPERATING POLICIES
Each Fund has adopted certain investment restrictions that are not
fundamental policies and may be changed by the Board of Directors without
approval of the Fund's outstanding voting securities. In the case of the Funds
other than the Europe Fund, these restrictions provide that a Fund may not:
1. Invest in interests in oil, gas, or other mineral exploration or
development programs (this restriction does not apply to the Emerging
Markets Fund).
2. Invest more than 5% of the value of its total assets in the securities
of any issuer which has a record of less than three years of continuous
operation (including the operation of any predecessor) (this
restriction does not apply to the Emerging Markets Fund);
3. Participate on a joint or a joint-and-several basis in any trading
account in securities (the aggregation of orders for the sale or
purchase of marketable portfolio securities with other accounts under
the management of the Investment Manager to save brokerage costs, or to
average prices among them, is not deemed to result in a securities
trading account).
Page 30
<PAGE>
4. Purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of "margin" deposits on the Fund's
existing futures positions and premiums paid for related options
entered into for the purpose of seeking to increase total return would
exceed 5% of the value of the Fund's net assets (this restriction does
not apply to the International Fund).
5. Invest more than 15% of the value of its net assets in securities that
are illiquid (this restriction applies only to the Balanced Fund; the
other Funds are subject to a similar fundamental policy).
IN THE CASE OF THE EUROPE FUND, THESE RESTRICTIONS PROVIDE THAT THE
FUND MAY NOT:
1. Invest in interests in oil, gas, or other mineral exploration or
development programs;
2. Participate on a joint or a joint-and-several basis in any trading
account in securities (the aggregation of orders for the sale or
purchase of marketable portfolio securities with other accounts under
the management of the Investment Manager to save brokerage costs, or to
average prices among them, is not deemed to result in a securities
trading account).
3. Purchase or sell futures if, immediately thereafter, the sum of the
amount of "margin" deposits on the Fund's existing futures positions
would exceed 5% of the value of the Fund's total assets.
4. Invest more than 15% of the value of its net assets in securities that
are illiquid.
The Funds are also subject to other restrictions under the 1940 Act;
however, the registration of the Company under the 1940 Act does not involve any
supervision by any federal or other agency of the Company's management or
investment practices or policies, other than incident to occasional or periodic
compliance examinations conducted by the SEC staff.
EXECUTION OF PORTFOLIO TRANSACTIONS
The Investment Manager, subject to the overall supervision of the Board
of Directors of each Company, makes each Fund's investment decisions and selects
the broker or dealer to be used in each specific transaction using its best
judgment to choose the broker or dealer most capable of providing the services
necessary to obtain the best execution of that transaction. In seeking the best
execution of a transaction, the Investment Manager evaluates a wide range of
criteria, including any or all of the following: the broker's commission rate,
promptness, reliability and quality of executions, trading expertise,
positioning and distribution capabilities, back-office efficiency, ability to
handle difficult trades, knowledge of other buyers and sellers, confidentiality,
capital strength and financial stability, prior performance in serving the
Investment Manager and its clients, and other factors affecting the overall
benefit to be received in the transaction. When circumstances relating to a
proposed transaction indicate to the Investment Manager that a particular broker
is in a position to obtain the best execution, the order is placed with that
broker. This may or may not be a broker that has provided investment information
and research services to the Investment Manager.
Such investment information may include, among other things: a wide
variety of written reports or other data on individual companies and industries;
data and reports on general market or economic conditions; information
concerning pertinent federal and state legislative and regulatory developments
and other developments that could affect the value of actual or potential
investments; information about companies in which the Investment Manager has
invested or may consider investing; attendance at meetings with corporate
management personnel, industry experts, economists, government personnel, and
other financial analysts; comparative issuer performance and evaluation and
technical measurement services; subscription to publications that provide
investment-related information; accounting and tax law interpretations;
availability of economic advice; quotation equipment and services; execution
measurement services; market-related and survey data concerning the products and
services of an issuer and its competitors or concerning a particular industry
that are used in reports prepared by the Investment Manager to enhance its
ability to analyze an issuer's financial condition and prospects; and other
services provided by recognized experts on investment
Page 31
<PAGE>
matters of particular interest to the Investment Manager. In addition, the
foregoing services may include the use of, or be delivered by, computer systems
whose hardware and/or software components may be provided to the Investment
Manager as part of the services. In any case in which information and other
services can be used for both research and non-research purposes, the Investment
Manager makes an appropriate allocation of those uses and pays directly for that
portion of the services to be used for non-research purposes.
Subject to the requirement of seeking the best execution, the
Investment Manager may, in circumstances in which two or more brokers are in a
position to offer comparable execution, give preference to a broker or dealer
that has provided investment information to the Investment Manager. In so doing,
the Investment Manager may effect securities transactions which cause a Fund to
pay an amount of commission in excess of the amount of commission another broker
would have charged. In electing such broker or dealer, the Investment Manager
will make a good faith determination that the amount of commission is reasonable
in relation to the value of the brokerage services and research and investment
information received, viewed in terms of either the specific transaction or the
Investment Manager's overall responsibility to the accounts for which the
Investment Manager exercises investment discretion. The Investment Manager
evaluates all commissions paid in order to ensure that the commissions represent
reasonable compensation for the brokerage and research services provided by such
brokers. Such investment information as is received from brokers or dealers may
be used by the Investment Manager in servicing all of its clients (including the
Funds), and a Fund's commissions may be paid to a broker or dealer who supplied
research services not used by the Fund. However, the Investment Manager expects
that each Fund will benefit overall by such practice because it is receiving the
benefit of research services and the execution of such transactions not
otherwise available to it without the allocation of transactions based on the
recognition of such research services.
Subject to the requirement of seeking the best execution, the
Investment Manager may also place orders with brokerage firms that have sold
shares of the Funds. The Investment Manager has made and will make no
commitments to place orders with any particular broker or group of brokers. The
Company anticipates that a substantial portion of all brokerage commissions will
be paid to brokers who supply investment information to the Investment Manager.
The Investment Manager has no obligation to purchase or sell for a Fund
any security that it, or its officers of employees, may purchase or sell for the
Investment Manager's or their own accounts or the account of any other client,
if in the opinion of the Investment Manager such transaction appears unsuitable,
impractical or undesirable for the Fund. Additionally, the Investment Manager
does not prohibit any of its officers or employees from purchasing or selling
for their own accounts securities that may be recommended to or held by the
Investment Manager's client's, subject to the Investment Manager's and the
Fund's Code of Ethics.
The Funds also invest in foreign and/or U.S. securities that are not
listed on a national securities exchange but are traded in the over-the-counter
market. The Funds may also purchase listed securities through the third market
or fourth market. When transactions are executed in the over-the-counter market
or the third or fourth market, the Investment Manager will seek to deal with the
counterparty that the Investment Manager believes can provide the best
execution, whether or not that counterparty is the primary market maker for that
security.
For the fiscal years ended December 31, 1997, 1998 and 1999, the Funds
paid total brokerage commissions as follows:
<TABLE>
<CAPTION>
--------------------------------- ------------------------------ ------------------------------- ------------------------------
FUND NAME 1997 1998 1999
--------------------------------- ------------------------------ ------------------------------- ------------------------------
<S> <C> <C> <C>
Dresdner RCM Large Cap Growth $8,344 $8,963 $15,209
Fund
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Tax Managed Growth N/A N/A $1,221
Fund
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Biotechnology Fund N/A $6,028 $18,207
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Balanced Fund N/A N/A $287
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Page 32
<PAGE>
<CAPTION>
--------------------------------- ------------------------------ ------------------------------- ------------------------------
FUND NAME 1997 1998 1999
--------------------------------- ------------------------------ ------------------------------- ------------------------------
<S> <C> <C> <C>
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Global Small Cap $19,389 $23,322 $32,714
Fund
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Global Technology $12,641 $27,683 $150,279
Fund
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Global Health Care $12,833 $14,634 $27,897
Fund
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM International $518,944 $438,519 $966,834
Growth Equity Fund
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Emerging Markets $3,913 $31,302 $50,468
Fund
--------------------------------- ------------------------------ ------------------------------- ------------------------------
Dresdner RCM Europe Fund $761,708 $1,282,143 $1,203,995
--------------------------------- ------------------------------ ------------------------------- ------------------------------
</TABLE>
All of the commissions paid during the fiscal year ended December 31,
1999, were paid to firms which provided research, statistical or other services
to the Investment Manager.
During the fiscal year ended 1999 the Large Cap Growth Fund, the Tax
Managed Growth Fund, the Biotechnology Fund, the Global Small Cap Fund, the
Global Technology Fund and the Global Health Care Fund each acquired the
securities of one of its regular broker-dealers (as defined in Rule 10b-1 under
the 1940 Act), the International Fund acquired the securities of five of its
regular broker-dealers and the Europe Fund acquired the securities of four of
its regular broker-dealers. At December 31, 1999 the Large Cap Growth Fund, the
Tax Managed Growth Fund, the Biotechnology Fund, the Global Small Cap Fund, the
Global Technology Fund and the Global Health Care Fund each had holdings in
State Street Bank and Trust Company valued at $525,000, $22,000, $1,348,000,
$897,000, $19,390,000 and $187,000, respectively. At December 31, 1999 the
International Fund's holdings in State Street Bank and Trust Company, Nomura
Securities, Deutsche Bank, Daiwa Securities and HSBC Holdings were valued at
$7,359,000, $1,209,000, $3,564,000, $5,615,000 and $1,876,000, respectively. At
December 31, 1999, the Europe Fund's holdings in Julius Baer Holdings Ltd.,
Banque Nationale de Paris, State Street Bank and Trust Company, and Deutsche
Bank were valued at $453, 000, $554,000, $412, 000 and $1,098,000, respectively.
As noted below, the Investment Manager is an indirect wholly owned
subsidiary of Dresdner Bank AG ("Dresdner"). Dresdner Kleinwort Benson North
America LLC ("Dresdner Kleinwort Benson") and other Dresdner subsidiaries may be
broker-dealers (collectively, the "Dresdner Affiliates"). The Investment Manager
believes that it is in the best interests of the Funds to have the ability to
execute brokerage transactions, when appropriate, through the Dresdner
Affiliates. Accordingly, the Investment Manager intends to execute brokerage
transactions on behalf of the Funds through the Dresdner Affiliates, when
appropriate and to the extent consistent with applicable laws and regulations,
including federal banking laws.
In all such cases, the Dresdner Affiliates will act as agent for the
Funds, and the Investment Manager will not enter into any transaction on behalf
of the Funds in which a Dresdner Affiliate is acting as principal for its own
account. In connection with such agency transactions, the Dresdner Affiliates
will receive compensation in the form of brokerage commissions separate from the
Investment Manager's management fee. The Investment Manager's policy is that
such commissions must be reasonable and fair when compared to the commissions
received by other brokers in connection with comparable transactions involving
similar securities and that the commissions paid to a Dresdner Affiliate must be
no higher than the commissions paid to that broker by any other similar customer
of that broker who receives brokerage and research services that are similar in
scope and quality to those received by the Funds.
During fiscal 1999, the Europe Fund paid its affiliated broker,
Dresdner RCM Kleinwort Benson North America LLC, total brokerage commissions of
$386,779, which represents 32.12% of the Fund's aggregate brokerage commissions
paid and 0.06% of the Fund's aggregate dollar amount of transactions effected
during its most recent fiscal year.
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<PAGE>
The Investment Manager performs investment management and advisory
services for various clients, including other registered investment companies,
and pension, profit-sharing and other employee benefit plans, as well as
individuals. In many cases, portfolio transactions for a Fund may be executed in
an aggregated transaction as part of concurrent authorizations to purchase or
sell the same security for numerous accounts served by the Investment Manager,
some of which accounts may have investment objectives similar to those of the
Fund. The objective of aggregated transactions is to obtain favorable execution
and/or lower brokerage commissions, although there is no certainty that such
objective will be achieved. Although executing portfolio transactions in an
aggregated transaction potentially could be either advantageous or
disadvantageous to any one or more particular accounts, aggregated transactions
in which a Fund participates will be effected only when the Investment Manager
believes that to do so will be in the best interest of the Fund, and the
Investment Manager is not obligated to aggregate orders into larger
transactions. These orders generally will be averaged as to price. When such
aggregated transactions occur, the objective will be to allocate the executions
in a manner which is deemed fair and equitable to each of the accounts involved
over time. In making such allocation decisions, the Investment Manager will use
its business judgment and will consider, among other things, any or all of the
following: each client's investment objectives, guidelines, and restrictions,
the size of each client's order, the amount of investment funds available in
each client's account, the amount already committed by each client to that or
similar investments, and the structure of each client's portfolio.
DIRECTORS AND OFFICERS
CAPITAL COMPANY AND GLOBAL COMPANY
The names and addresses of the Directors and officers of the Capital
Company and the Global Company and their principal occupations and certain other
affiliations during the past five years are given below. Unless otherwise
specified, the address of each of the following persons is Four Embarcadero
Center, San Francisco, California 94111.
DEWITT F. BOWMAN, (69), Chairman and Director. Mr. Bowman is a
Principal of Pension Investment Consulting, with which he has been associated
since February 1994. From February 1989 to January 1994, he was Chief Investment
Officer for California Public Employees Retirement System, a public pension
fund. He serves as a director of RREEF America REIT, Inc. and the Wilshire
Target Funds Inc.; and as a trustee of Brandes Institutional International
Investment Trust, the Pacific Gas and Electric Nuclear Decommissioning Trust,
and the PCG Private Equity Fund.
PAMELA A. FARR, (54), Director. Ms. Farr is a partner in Best & Co.
LLC, a manufacturer and retailer of children's clothing and accessories. From
1991 to 1994, she was President of Banyan Homes, Inc., a real estate development
and construction firm; and for eight years she was a management consultant for
McKinsey & Company, where she served a variety of Fortune 500 companies in all
aspects of strategic management and organizational structure.
GEORGE B. JAMES, (62), Director. Mr. James serves as a director of
Basic Vegetable Products, California Sun Dry Foods, Clayton Group, Inc., and
Crown Vantage, Inc. Mr. James also serves as a trustee of the Committee for
Economic Development and the California Pacific Medical Center Foundation. From
1985 to 1999 Mr. James was a Senior Vice President and Chief Financial Officer
of Levi Strauss & Co. Mr. James, previously, was Chair of the Advisory Committee
to the California Public Employees Retirement System.
JOHN A. KRIEWALL (59) Director. (Capital Company only) Mr. Kriewall is
retired from his position as Managing Director of Dresdner RCM, with which he
had been associated since 1973. He also served Dresdner RCM as Co-Chief
Investment Officer of the Mid Cap Team and was a member of the Mid Cap Team
Management Committee. He received his BS degree from Stanford University and in
1971 received his MBA from Stanford University. Following graduation, he joined
the Trust Division of United California Bank and assisted in the founding of its
investment counseling subsidiary, Western Asset Management. Mr. Kriewall is an
"interested person" (as defined in the 1940 Act) by virtue of his affiliation
with the Investment Manager.
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<PAGE>
GEORGE G.C. PARKER, (61), Director. Mr. Parker is Associate Dean for
Academic Affairs, and Director of the MBA Program and Dean Witter Professor of
Finance at the Graduate School of Business at Stanford University, with which he
has been associated since 1973. Mr. Parker has served on the Board of Directors
of: the California Casualty Group of Insurance Companies since 1977; BB&K
Holdings, Inc., a holding company for financial services companies, since 1980;
H. Warshow & Sons, Inc., a manufacturer of specialty textiles, since 1982;
Zurich Reinsurance Centre, Inc., a large reinsurance underwriter, since 1994;
and Continental Airlines, since 1996. Mr. Parker served on the Board of
Directors of the University National Bank & Trust Company from 1986 to 1995.
KENNETH E. SCOTT, (71), Director (Capital Company only). Mr. Scott is
the Ralph M. Parsons Professor of Law and Business at Stanford Law School, with
which he has been associated since 1967. He is also a director of certain
registered investment companies managed by Benham Capital Management.
ANTHONY AIN, (40), President. Mr. Ain is a Managing Director and
General Counsel of Dresdner RCM, with which he has been associated since 1992.
From 1988 to 1992, he worked for the United States Securities and Exchange
Commission, first as Counsel to Commissioner Joseph A. Grundfest, then as a
Senior Special Counsel in the SEC's Division of Market Regulation. From 1984 to
1988, he was an associate in the Washington, D.C. office of Fried, Frank,
Harris, Shriver & Jacobson, where he practiced securities and banking law.
ROBERT J. GOLDSTEIN, (37), Vice President and Secretary. Mr. Goldstein
is a Director and Associate General Counsel of Dresdner RCM, with which he has
been associated since 1997. From 1990 to 1996, Mr. Goldstein was an associate in
the New York, London and Prague offices of Weil, Gotshal & Manges where his
practice primarily focused on private investment and hedge funds, and
international transactional and general corporate matters.
KARIN L. BROTMAN, (33), Assistant Secretary. Ms. Brotman is Assistant
Fund Counsel of Dresdner RCM, with which she has been associated since 1997.
From 1995 to 1997, Ms. Brotman was a Product Manager at Fidelity Investments in
their Legal Department, where she was involved in providing legal and compliance
for 1940 Act registered management investment companies. From 1993 to 1995, she
was employed as an Account Officer with Fleet Financial Group where she was
responsible for negotiating the legal recovery of a distressed asset portfolio.
JENNIE W. KLEIN, (35), Vice President and Treasurer. Ms. Klein is
Director of Commingled Fund Services and a Director of Dresdner RCM, with which
she has been associated since 1994. She is responsible for fund administration
and shareholder record keeping for the Dresdner RCM products. From 1991 to 1994,
Ms. Klein was employed at G.T. Capital Management as the Manager of Financial
Reporting and Compliance for their mutual funds. From 1988 to 1991, she was an
auditor at KPMG Peat Marwick.
STEVEN L. WONG, (33), Assistant Treasurer. Mr. Wong is a Manager in
Commingled Fund Services and has been associated with Dresdner RCM since 1994.
He is responsible for overseeing Dresdner RCM's mutual fund administration which
includes financial reporting, compliance, tax reporting, fund accounting,
budgeting and shareholder servicing. From 1992 to 1994, Mr. Wong was a senior
auditor at KPMG Peat Marwick specializing in the audit of investment companies.
From 1991 to 1992, he was a fund accountant with Franklin Funds.
Regular meetings of each Company's Board of Directors are held on a
quarterly basis. Each Company's Audit Committee, whose present members are
George G.C. Parker and Kenneth E. Scott for the Capital Company and DeWitt F.
Bowman and George B. James, for the Global Company, meets with its independent
accountants to exchange views and information and to assist the full Board in
fulfilling its responsibilities relating to corporate accounting and reporting
practices. Each Director of the Capital Company receives a fee of $9,000 per
year plus $1,500 per series for each Board meeting attended and $500 for each
Audit Committee meeting attended and each Director of the Global Company
receives a fee of $1,000 per year plus $500 for each Board meeting attended and
$250 for each Audit Committee meeting attended. Each Director is reimbursed for
travel and other expenses incurred in connection with attending Board meetings.
Page 35
<PAGE>
The following table sets forth the aggregate compensation paid by the
Capital Company and the Global Company for the fiscal year ended December 31,
1999, to the Directors for service on the Board of Directors and that of all
other funds in the "Company complex" (as defined in Schedule 14A under the
Securities Exchange Act of 1934):
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from the Capital
Aggregate Aggregate Benefits Accrued Company, Global
Compensation Compensation as Part of Estimate Annual Company and Company
Director from the Global from the the Companies' Benefits Upon Complex
Name Company Capital Company Expenses Retirement Paid to Director (1)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DeWitt F. Bowman $21,250 $27,000 $24,125 N/A $48,250
Pamela A. Farr $19,000 $27,000 $46,000 N/A $46,000
George B. James $21,250 $27,000 None N/A $48,250
John A. Kriewall N/A $0 None N/A $0
George G.C. Parker $19,000 $28,500 $47,500 N/A $47,500
Kenneth E. Scott N/A $28,500 $14,250 N/A $28,500
Total $80,500 $138,000 $131,875 $218,500
---------------------
</TABLE>
(1) During the fiscal year ended December 31, 1999, there were thirteen
funds in the Company complex.
Each Director of the Capital Company or the Global Company who is not
an "interested person" as that term is defined in the 1940 Act, of the
Investment Manager may elect to defer receipt of all or a portion of his or her
fees for service as a Director in accordance with the terms of a Deferred
Compensation Plan for Non-Interested Directors ("Directors' Plan"). Under the
Directors' Plan, an eligible Director may elect to have his or her deferred fees
deemed invested either in 90-day U.S. Treasury bills, shares of the Common Stock
of the Company of which he or she is a Director, or a combination of these
options, and the amount of deferred fees payable to such director under the
Directors' Plan will be determined by reference to the return on such deemed
investments. Generally, the deferred fees (reflecting any earnings, gains or
losses thereon) become payable upon the Director's retirement or disability. The
obligation to make these payments to the Directors of a Company pursuant to the
Directors' Plan is a general obligation of such Company. Each Fund may, to the
extent permitted by the 1940 Act, invest in 90-day U.S. Treasury bills or the
Common Stock of the Capital Company and/or the Global Company, to match its
share of the deferred compensation obligation under the Directors' Plan. As of
December 31, 1998, no Director or officer of either Company was a beneficial
owner of any shares of the outstanding Common Stock of any series of the
Companies.
INVESTMENT COMPANY
The names and addresses of the Directors and officers of the Investment
Company and their principal occupations and certain other affiliations during
the past five years are given below. Unless otherwise specified, the address of
each of the following persons is Four Embarcadero Center, San Francisco,
California 94111.
ROBERT J. BIRNBAUM (72), DIRECTOR. Director, Chicago Board Options
Exchange (since 1998); Director, Chicago Mercantile Exchange (1990 to 1998);
Trustee, Liberty All-Star Growth Fund, Inc. (since 1995); Trustee, Colonial
Funds (since 1995); Trustee, Liberty All-Star Equity Fund, Inc. (since 1994);
Special Counsel, Dechert Price & Rhoads (law firm) (1988 to 1993); President and
Chief Operating Officer, New York Stock Exchange, Inc. (1985 to 1988); President
and Chief Operating Officer, American Stock Exchange, Inc. (1977 to 1985).
Page 36
<PAGE>
CARROLL BROWN (71), DIRECTOR. President, The American Council on
Germany (since 1988); Executive Director, John J. McCloy Fund (since 1988);
Foreign Service Officer, United States Department of State with service in
Yugoslavia, Poland, Austria, and Germany (1957 to 1988); U.S. Consul General,
Dusseldorf and Munich; Deputy Assistant Secretary of State, U.S. State
Department (1986 and 1987).
THEODORE J. COBURN (46), DIRECTOR. Partner, Brown, Coburn & Co., a
consulting firm (since 1991); education associate at Harvard University Graduate
School of Education (since 1996); Director, Nicholas-Applegate Fund, Inc. (since
1987); Trustee, Nicholas-Applegate Mutual Funds (since 1992); Director,
Measurement Specialties, Inc. (since 1995); Director, Moovies, Inc. (since
1995); Senior Vice President, Prudential Securities Inc. (1986 to 1991);
Managing Director of the Global Equity Transactions Group and a member of the
Board of Directors, Prudential Securities (1986 to 1991); Managing Director,
Merrill Lynch Capital Markets (1983 to 1986).
SIEGFRIED A. KESSLER (82), DIRECTOR. Retired; Chairman. Carl Zeiss Inc.
(New York) (1981 to 1982) and President (1965 to 1981) (sale, distribution and
service of scientific instruments and optical products) (1965 to 1985).
ALFRED FIORE (62), DIRECTOR. General Manager, Hirschfeld, Stern, Moyer
& Ross, Inc. (employee benefit consulting firm) (since 1988); Consultant,
Lois/U.S.A. (creative advertising agency) (1987 to 1988); Executive Vice
President and Chief Financial Officer, Parlux Fragrances, Inc. (1987); Executive
Vice President and Chief Financial Officer, Concord Assets Group, Inc. (real
estate manager) (1986); President and Chief Operating Officer, Amerigroup
Financial Services, Inc. (financial services) (1984 to 1986); Partner, KPMG Peat
Marwick, LLP (1973 to 1984).
GOTTFRIED W. PERBIX (70), DIRECTOR. President, Perbix International,
Inc. (management consulting) (1980 to 1994); Director, American Profol Inc.
(plastic film manufacturers) (since 1993); Sole Proprietor, Perbix Associates
(executive search) (since 1978).
JACOB SALIBA (86), DIRECTOR. Director, Chairman (1988 to 1994) and
Chief Executive Officer (1988 to 1993), Katy Industries, Inc. (diversified
manufacturing and oil and related services); President and Chief Operating
Officer, Katy Industries, Inc. (1968 to 1987); Director, CEGF Compagnie des
Entrepots et Gares Frigorifques (cold storage warehouses) (since 1989);
Director, Schon & Cie AG (manufacturer of machinery) (since 1990); Director,
Sahlman Seafoods (shrimp fishing and shrimp aquaculture) (since 1998); Director,
Syratech Corp. (manufacturer of household furnishings) (1992 to 1998).
ANTHONY AIN, (40), President. Mr. Ain is a Managing Director and
General Counsel of Dresdner RCM, with which he has been associated since 1992.
From 1988 to 1992, he worked for the United States Securities and Exchange
Commission, first as Counsel to Commissioner Joseph A. Grundfest, then as a
Senior Special Counsel in the SEC's Division of Market Regulation. From 1984 to
1988, he was an associate in the Washington, D.C. office of Fried, Frank,
Harris, Shriver & Jacobson, where he practiced securities and banking law.
ROBERT J. GOLDSTEIN, (37), Vice President and Secretary. Mr. Goldstein
is a Director and Associate General Counsel of Dresdner RCM, with which he has
been associated since 1997. From 1990 to 1996, Mr. Goldstein was an associate in
the New York, London and Prague offices of Weil, Gotshal & Manges where his
practice primarily focused on private investment and hedge funds, and
international transactional and general corporate matters.
KARIN L. BROTMAN, (33), Assistant Secretary. Ms. Brotman is Assistant
Fund Counsel of Dresdner RCM, with which she has been associated since 1997.
From 1995 to 1997, Ms. Brotman was a Product Manager at Fidelity Investments in
their Legal Department, where she was involved in providing legal and compliance
for 1940 Act registered management investment companies. From 1993 to 1995, she
was employed as an Account Officer with Fleet Financial Group where she was
responsible for negotiating the legal recovery of a distressed asset portfolio.
JENNIE W. KLEIN, (35), Vice President and Treasurer. Ms. Klein is
Director of Commingled Fund Services and a Director of Dresdner RCM, with which
she has been associated since 1994. She is responsible for fund administration
and shareholder record keeping for the Dresdner RCM products. From 1991 to 1994,
Ms. Klein was
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<PAGE>
employed at G.T. Capital Management as the Manager of Financial Reporting and
Compliance for their mutual funds. From 1988 to 1991, she was an auditor at KPMG
Peat Marwick.
STEVEN L. WONG, (33), Assistant Treasurer. Mr. Wong joined Dresdner RCM
in 1994 and is the Manager of Commingled Fund Services. He is responsible for
overseeing Dresdner RCM's mutual fund administration which includes financial
reporting, compliance, tax reporting, fund accounting, budgeting and shareholder
servicing. From 1992 to 1994, Mr. Wong was a senior auditor at KPMG Peat Marwick
specializing in the audit of investment companies. From 1991 to 1992, he was a
fund accountant with Franklin Funds.
Effective January 1, 1999, the Fund pays each of its Directors who is
not an interested person of the Fund, as defined in the 1940 Act, an annual fee
of $9,000, plus $1,500 for each Board of Directors meeting attended. Effective
November 4, 1999, the Fund pays each of the members of the Audit Committee of
the Board of Directors who is not an interested person of the Fund, as defined
in the 1940 Act $500 for each Audit Committee meeting attended. During the
fiscal year ended December 31, 1999, all such Directors as a group received from
the Fund aggregate fees amounting to $175,250. In addition, the Fund reimburses
Directors not affiliated with Dresdner RCM for travel and out-of-pocket expenses
incurred in connection with meetings of the Board.
The following table sets forth for each Director receiving compensation
from the Europe Fund the amount of such compensation paid by the Fund during the
fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED AS ESTIMATED ANNUAL FROM EUROPE FUND
COMPENSATION FROM PART OF BENEFITS UPON AND FUND COMPLEX
NAME OF PERSON, POSITION EUROPE FUND FUND EXPENSES RETIREMENT PAID TO DIRECTORS(1)
<S> <C> <C> <C> <C>
Robert J. Birnbaum $30,500 N/A __ $30,500
Carroll Brown $18,000 N/A __ $18,000
Theodore J. Coburn $30,000 N/A __ $30,000
James E. Dowd(2) $11,250 N/A __ $11,250
Alfred W. Fiore $30,500 N/A __ $30,500
Siegfried A. Kessler $18,500 N/A __ $18,500
Gottfried W. Perbix $18,500 N/A __ $18,500
Jacob Saliba $18,500 N/A __ $18,500
-----------------------------------------------------------------------------------------
TOTAL $175,750 $175,250
</TABLE>
(1) During the fiscal year ended December 31, 1999, there were thirteen funds in
the complex.
(2) Mr. Dowd served as Director of the Company from 1990 through May 1999.
During the fiscal year ended December 31, 1998, the Board of Directors
met five times and during the fiscal year ending December 31, 1999, the Board of
Directors met six times. Each Director, except Mr. Dowd, attended at least 75%
of the total number of meetings of the Board and each Committee of the Board of
which he was a
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<PAGE>
member held during the period in which he served. Mr. Dowd passed away in May
1999. The Board wishes to express its appreciation for his long and valuable
service to the Fund.
The Board of Directors has an Audit Committee presently composed of
Messrs. Perbix, Fiore, Birnbaum and Kessler, none of whom is an interested
person of the Fund (as defined in the 1940 Act). The Audit Committee makes
recommendations to the full Board with respect to the engagement of independent
accountants and reviews with the independent accountants the plan and results of
the audit engagement and matters having a material effect upon the Fund's
financial operations. The Audit Committee held two meetings during the fiscal
year ended December 31, 1998 and two meetings during the fiscal year ending
December 31, 1999.
In 1998, the Board of Directors established an ad hoc Strategic
Planning and Communications Committee, composed of Messrs. Birnbaum, Coburn, and
Fiore, none of whom is an interested person of the Fund (as defined in the 1940
Act), to communicate with stockholders on behalf of the full Board of Directors
and to consider various strategic options for the future of the Fund, including,
whether the Fund should convert from a closed-end investment company to an
open-end investment company. Strategic Planning and Communications Committee
members received $1,500 per meeting in 1998. There were 8 such meetings in 1999.
The Board of Directors has no compensation committee, or other
committee performing a similar function. Upon conversion of the Fund to an
open-end structure, a Nominating Committee was established, which consists of
the Directors who are not interested persons of the Fund (as defined in the 1940
Act).
Control Persons and Principal Holders of Securities
As of March 31, 2000, there were 14,622,094 shares of the International
Growth Equity Fund outstanding, 9,846,845 shares of the Global Technology Fund
outstanding, 1,954,227 shares of the Global Small Cap Fund outstanding,
1,931,779 shares of the Global Health Care Fund outstanding, 1,278,662 shares of
the Large Cap Growth Fund outstanding, 10,073,071 shares of the Biotechnology
Fund outstanding, 572,368 shares of the Emerging Markets Fund outstanding,
697,423 shares of the Tax Managed Growth Fund outstanding, 311,228 shares of the
Balanced Fund outstanding and 4,872,928 shares of the Europe Fund outstanding.
On that date the following were known to the Companies to own of record more
than 5% of the Funds' outstanding capital stock:
<TABLE>
<CAPTION>
Name and Address of % of Shares
Beneficial Owner Shares Held Outstanding
<S> <C> <C>
LARGE CAP GROWTH FUND
Pacific Maritime Association 415,233 32.47%
P.O. Box 7861
San Francisco, California 94120-786
Congoleum Corp Master Trust 280,445 21.93%
3705 Quakerbridge Road
Mercerville, New Jersey 08619-0127
AAA Washington 176,968 13.84%
1745 114th Avenue SE
Bellevue, Washington 98004-6968
Page 39
<PAGE>
<CAPTION>
Name and Address of % of Shares
Beneficial Owner Shares Held Outstanding
<S> <C> <C>
Charles Schwab & Co., Inc. 88,097 6.89%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
TAX MANAGED GROWTH FUND
Boston & Company 370,514 53.13%
Mutual Fund Operations
P.O. Box 3198
Pittsburgh, PA
Clients of Dresdner Bank AG/ 100,000 14.34%
Investment Management
Institutional Asset Management Division
Jorgen-Ponto-Platz
60301 Frankfurt
Germany
Madre Lode 66,094 9.48%
731 Madre Street
Pasadena, California 91107-5662
Charles Schwab & Co., Inc. 39,023 5.60%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
BIOTECHNOLOGY FUND
Charles Schwab & Co., Inc. 4,724,992 46.91%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 2,254,639 22.38%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
National Investors Service Corp. 692,026 6.87%
FBO Customers
55 Water Street
New York, New York 10041-0098
Page 40
<PAGE>
<CAPTION>
Name and Address of % of Shares
Beneficial Owner Shares Held Outstanding
<S> <C> <C>
BALANCED FUND
Pacific Maritime Association Deferred 206,889 66.48%
Compensation Plan
P.O. Box 7861
San Francisco, California 94120-7861
Bank of New York 104,339 33.52%
FBO Joseph W. Saunders IRA
1 Wall Street 23rd Floor
New York, New York 10286-0001
GLOBAL SMALL CAP FUND
Dean Witter Discover & Co. 528,360 27.04%
333 Market Street 25th Floor
San Francisco, California 94105-2102
Charles Schwab & Co., Inc. 452,604 23.16%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 372,835 19.08%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
Clients of Dresdner Bank AG/ 320,064 16.38%
Investment Management
Institutional Asset Management Division
Jorgen-Ponto-Platz
60301 Frankfurt
Germany
National Investors Service Corp. 106,547 5.45%
FBO Customers
55 Water Street
New York, New York 10041-0098
GLOBAL TECHNOLOGY FUND
Charles Schwab & Co., Inc. 3,504,522 35.59%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
Page 41
<PAGE>
<CAPTION>
Name and Address of % of Shares
Beneficial Owner Shares Held Outstanding
<S> <C> <C>
National Financial Services Corp. 2,400,394 24.38%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
National Investors Service Corp. 572,185 5.81%
FBO Customers
55 Water Street
New York, New York 10041-0098
GLOBAL HEALTH CARE FUND
Charles Schwab & Co., Inc. 758,042 39.24%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
Clients of Dresdner Bank AG/ 400,000 20.71%
Investment Management
Institutional Asset Management Division
Jorgen-Ponto-Platz
60301 Frankfurt
Germany
National Financial Services Corp. 346,398 17.93%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
National Investors Service Corp. 119,017 6.16%
FBO Customers
55 Water Street
New York, New York 10041-0098
INTERNATIONAL GROWTH EQUITY FUND
Citigroup Inc. Pension Plan 3,397,203 23.23%
1 Court Square 15th Floor
Long Island City, New York 111120-0001
JM Family Enterprises, Inc. 1,615,782 11.05%
100 NW 12th Avenue
Deerfield Beach, Florida 33442
Page 42
<PAGE>
<CAPTION>
Name and Address of % of Shares
Beneficial Owner Shares Held Outstanding
<S> <C> <C>
Boston Safe Deposit and Trust Company 1,170,340 8.00%
FBO Blue Cross and Blue Shield of
Massachusetts Retirement Income Trust
100 Summer Street
Boston, Massachusetts 02110
EMERGING MARKETS FUND
Clients of Dresdner Bank AG/ 300,000 52.41%
Investment Management
Institutional Asset Management Division
Jorgen-Ponto-Platz
60301 Frankfurt
Germany
National Financial Services Corp. 101,298 17.70%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
Charles Schwab & Co., Inc. 89,686 15.67%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
Madre Lode 51,943 9.00%
731 Madre Street
Pasadena, California 91107-5662
EUROPE FUND
Charles Schwab & Co., Inc. 987,589 20.27%
FBO Customers
101 Montgomery Street
San Francisco, California 94104
National Financial Services Corp. 344,467 7.07%
FBO Customers
200 Liberty Street
One World Financial Center
New York, New York 10281-1003
Smith Barney Inc. 300,863 6.17%
388 Greenwich Street
New York, New York 10013-2339
Page 43
<PAGE>
<CAPTION>
Name and Address of % of Shares
Beneficial Owner Shares Held Outstanding
<S> <C> <C>
Marshcove & Co. 290,930 5.97%
P.O. Box 5756
Boston, Massachusetts 02206-0001
</TABLE>
THE INVESTMENT MANAGER
The Board of Directors of each Company has overall responsibility for
the operation of such Company's Funds. Pursuant to such responsibility, the
Board of Directors of each Company has approved various contracts for designated
financial organizations to provide, among other things, day to day management
services required by the Funds. Each Company has retained as the Funds'
Investment Manager, Dresdner RCM Global Investors LLC, a Delaware limited
liability company with principal offices at Four Embarcadero Center, San
Francisco, California 94111. The Investment Manager is actively engaged in
providing investment supervisory services to institutional and individual
clients. The Investment Manager was established in December of 1998 and is the
successor to the business of its holding company, Dresdner RCM Global Investors
US Holdings LLC. The Investment Manager was originally formed as Rosenberg
Capital Management in 1970, and it and its successors have been consistently in
business since then.
The Investment Manager is an indirect wholly owned subsidiary of
Dresdner Bank, an international banking organization with principal executive
offices located at Gallunsanlage 7, 60041 Frankfurt, Germany. With total
consolidated assets as of December 31, 1999, of EUR 397 billion (USD 463
billion), and approximately 1,500 offices and 51,000 employees in over 60
countries around the world, Dresdner is one of Germany's largest banks. Dresdner
provides a full range of banking services including, traditional lending
activities, mortgages, securities, project finance and leasing, to private
customers and financial and institutional clients. In the United States,
Dresdner maintains branches in New York and Chicago and an agency in Los
Angeles. As of the date of this SAI, the nine members of the Board of Managers
of the Investment Manager are William L. Price (Chairman), Gerhard Eberstadt,
George N. Fugelsang, Joachim Madler, Leonhard Fischer, Susan C. Gause, Luke D.
Knecht, William S. Stack, and Kenneth B. Weeman, Jr.
Dresdner and the Investment Manager, by virtue of Dresdner's banking
operations in the United States, are subject to U.S. banking laws and
regulations. U.S. banking organizations generally may act as advisers to
investment companies and may buy and sell investment company shares for their
customers. The Investment Manager believes that it may perform the services
contemplated by its investment management agreements with the Company without
violating these banking laws or regulations. In addition, effective March 11,
2000, banking organizations that qualify as and elect to become financial
holding companies are permitted to sponsor and distribute the shares of
investment companies. Thus, the extent to which Dresdner qualifies and elects to
engage in these activities, as well as future changes in legal requirements or
regulatory interpretations relating to permissible activities of banking
organizations and their affiliates, could affect the nature and scope of
services provided to the Company by the Investment Manager or its affiliates.
The Investment Manager provides the Funds with investment supervisory
services pursuant to Investment Management Agreements, Powers of Attorney and
Service Agreements (the "Management Agreements") dated as of June 14, 1996 for
the Global Technology Fund and International Fund, December 27, 1996 for the
Global Small Cap Fund, Global Health Care Fund and Large Cap Fund, December 30,
1997 for the Biotechnology Fund and Emerging Markets Fund, December 30, 1998 for
the Tax Managed Growth Fund, January 26, 1999 for the Europe Fund and December
15, 2000 for the Balanced Fund. The Investment Manager manages the Funds'
investments, provides various administrative services, and supervises the Funds'
daily business affairs, subject to the authority of the Boards of Directors. The
Investment Manager is also the investment manager for Dresdner RCM Growth Equity
Fund and Dresdner RCM Small Cap Fund, each a series of Dresdner RCM Capital
Funds, Inc.; Dresdner RCM Global Equity Fund and Dresdner RCM Strategic Income
Fund, each a series of Dresdner RCM Global Funds, Inc.; and RCM Strategic Global
Government Fund, Inc., Bergstrom Capital Corporation, and Dresdner RCM Global
Strategic Income Fund, Inc., each closed-end management investment companies. A
Fund's Management Agreement may be renewed from year-to-year after its initial
term, provided that any such renewals have been specifically approved at least
annually by (i) the
Page 44
<PAGE>
vote of a majority of the Company's Board of Directors, including a majority of
the Directors who are not parties to the Management Agreement or interested
persons (as defined in the 1940 Act) of any such person, cast in person at a
meeting called for the purpose of voting on such approval, or (ii) the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund and the vote of a majority of the Directors who are not parties to the
contract or interested persons of any such party.
Each Fund has, under its respective Management Agreement, assumed the
obligation for payment of all of its ordinary operating expenses, including: (a)
brokerage and commission expenses, (b) federal, state, or local taxes incurred
by, or levied on, the Fund, (c) interest charges on borrowings, (d) charges and
expenses of the Fund's custodian, (e) investment advisory fees (including fees
payable to the Investment Manager under the Management Agreement), (f) fees
pursuant to the Fund's Rule 12b-1 plan, (g) legal and audit fees, (h) SEC and
"Blue Sky" registration expenses, and (i) compensation, if any, paid to officers
and employees of the Company who are not employees of the Investment Manager
(see DIRECTORS AND OFFICERS). The Investment Manager is responsible for all of
its own expenses in providing services to the Funds. Expenses attributable to a
Fund are charged against the assets of the Fund.
For the services rendered by the Investment Manager under each Fund's
Investment Management Agreement, each Fund pays management fees at an annualized
rate of its average daily net assets, as described in the Prospectus. For the
fiscal years ended December 31, 1999, 1998 and 1997, the International Fund
incurred fees of $1,233,869, $878,692 and $611,884 and the Global Technology
Fund incurred fees of $683,211, $104,008 and $61,204, the Global Small Cap Fund
incurred fees of $72,416, $52,418, and $45,183 the Global Health Care Fund
incurred fees of $54,854, $50,736 and $46,238, the Large Cap Growth Fund
incurred fees of $85,913, $40,991 and $33,041, the Biotechnology Fund incurred
fees of $58,217, $31,260 and $165, the Emerging Markets Fund incurred fees of
$34,657, $28,446 and $164 and the Europe Fund incurred fees of $927,995,
$1,915,266 and $1,555,539. For fiscal 1999 and 1998, the Tax Managed Growth Fund
incurred fees of $10,058 and $21. For fiscal 1999 the Balanced Fund incurred
fees of $279.
The Investment Manager has agreed to limit each Fund's expenses as
described in the Prospectus. Each Fund has agreed to reimburse the Investment
Manager, for a period of up to five years, for any such payments to the extent
that the Fund's operating expenses are otherwise below this expense cap. This
obligation will not be recorded on the books of a Fund to the extent that the
total operating expenses of the Fund are at or above the expense cap. However,
if the total operating expenses of a Fund fall below the expense cap, the
reimbursement to the Investment Manager will be accrued by the Fund as a
liability.
Each Fund's Management Agreement provides that the Investment Manager
will not be liable for any error of judgment or for any loss suffered by the
Fund in connection with the matters to which the Management Agreement relates,
except for liability resulting from willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of the Investment
Manager's reckless disregard of its duties and obligations under the Management
Agreement. The Company has agreed to indemnify the Investment Manager out of the
assets of each Fund, against liabilities, costs and expenses that the Investment
Manager may incur in connection with any action, suit, investigation or other
proceeding arising out of or otherwise based on any action actually or allegedly
taken or omitted to be taken by the Investment Manager in connection with the
performance of its duties or obligations under the Management Agreement with
respect to the Fund or otherwise as investment manager of the Fund. The
Investment Manager is not entitled to indemnification with respect to any
liability to a Fund or its stockholders by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties, or of its reckless
disregard of its duties and obligations under the Management Agreement.
Each Management Agreement is terminable without penalty on 60 days'
written notice by a vote of the majority of the outstanding voting securities of
the Fund which is the subject of the Management Agreement, by a vote of the
majority of the respective Company's Board of Directors, or by the Investment
Manager on 60 days' written notice and will automatically terminate in the event
of its assignment (as defined in the 1940 Act).
Page 45
<PAGE>
THE DISTRIBUTOR
Funds Distributor, Inc., 60 State Street, Suite 1300, Boston,
Massachusetts 02109 (the "Distributor") serves as Distributor to each Fund. The
Distributor has provided mutual fund distribution services since 1976, and is a
subsidiary of Boston Institutional Group, Inc., which provides distribution and
other related services with respect to investment products.
DISTRIBUTION AGREEMENT
Pursuant to Distribution Agreements with the Capital Company, the
Global Company and the Investment Company, the Distributor has agreed to use its
best efforts to effect sales of shares of the Funds, but is not obligated to
sell any specified number of shares. Each Distribution Agreement contains
provisions with respect to renewal and termination similar to those in each
Fund's Management Agreement discussed above. Pursuant to the Distribution
Agreements, the Companies have agreed to indemnify the Distributor out of the
assets of each Fund to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933 arising in connection with the
Distributor's activities on behalf of the Companies.
Each Company also has an Agreement with the Investment Manager and the
Distributor pursuant to which the Distributor has agreed to provide: regulatory,
compliance and related technical services to the Company; services with regard
to advertising, marketing and promotional activities; and officers to the
Companies. The Investment Manager is required to reimburse the Company for any
fees and expenses of the Distributor pursuant to the Agreements.
DISTRIBUTION PLAN AND DISTRIBUTION AND SERVICE PLAN
The Global Company, on behalf of its Dresdner RCM Large Cap Growth
Fund, Dresdner RCM Global Small Cap Fund, Dresdner RCM Emerging Markets Fund,
Dresdner RCM Biotechnology Fund, Dresdner RCM Global Health Care Fund, Dresdner
RCM Global Technology and Dresdner RCM Tax Managed Growth Fund Class N shares,
and the Capital Company, on behalf of its Dresdner RCM International Growth
Equity Fund Class N shares have adopted distribution and service plans, (the
"Global Plan" and the "Capital Plan") and the Investment Company, on behalf of
its Dresdner RCM Europe Fund Class N shares has adopted a distribution plan
(with the Global Plan and the Capital Plan, collectively, the "Plans") pursuant
to Rule 12b-1 under the 1940 Act. Under the Plans, each Fund pays the
Distributor an annual fee of up to 0.25% of the average daily net assets of its
Class N shares as reimbursement for certain expenses actually incurred by the
Distributor in connection with providing distribution and shareholder support
services to such shares. Class I shares are not subject to 12b-1 fees. The
Distributor is reimbursed for: (a) expenses incurred in connection with
advertising and marketing the N Class of shares of the Funds, including but not
limited to any advertising by radio, television, newspapers, magazines,
brochures, sales literature, telemarketing or direct mail solicitations; (b)
periodic payments of fees or commissions for distribution assistance made to one
or more securities brokers, dealers or other industry professionals such as
investment advisers, accountants, estate planning firms and the Distributor
itself in respect of the average daily value of shares owned by clients of such
service organizations, and (c) expenses incurred in preparing, printing and
distributing the Funds' prospectus and statement of additional information.
Each Plan continues in effect from year to year with respect to each
Fund, provided that each such continuance is approved at least annually by a
vote of the Board of Directors of the respective Company, including a majority
vote of the Directors who are not "interested persons" of the Company within the
meaning of the 1940 Act and have no direct or indirect financial interest in the
Plan or in any agreement related to the Plan, cast in person at a meeting called
for the purpose of voting on such continuance. The Plan may be terminated with
respect to a Fund at any time, without penalty, by the vote of a majority of the
outstanding shares of the Fund. The Plans may not be amended to increase
materially the amounts to be paid by a Fund for the services described therein
without approval by the shareholders of the Fund, and all material amendments
are required to be approved by the Board of Directors of
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<PAGE>
the respective Company in the manner described above. Each Plan will
automatically terminate in the event of its assignment.
If in any year Funds Distributor is due more from the Fund for such
services than is immediately payable because of the expense limitation under the
Plans, the unpaid amount is carried forward while the Plans are in effect until
such later year as it may be paid. There is no limit on the periods during which
unreimbursed expenses may be carried forward, although the Funds are not
obligated to repay any outstanding unreimbursed expenses that may exist if the
Plans are terminated or not continued. No interest, carrying, or finance charge
will be imposed on any amounts carried forward.
During fiscal 1999, the International Growth Equity Fund, Global
Technology Fund, Global Small Cap Fund, Global Health Care Fund, Large Cap
Growth Fund, Biotechnology Fund, Emerging Markets Fund, Tax Managed Growth Fund
and Europe Fund reimbursed the Distributor $1,011, $34,870, $541, $13,714, $151,
$14,438, $146, $423 and $91,278, respectively, for certain expenses actually
incurred by the Distributor. These fees reimbursed the Distributor for expenses
actually incurred in connection with the Funds' participation in fund
supermarket platforms. Unreimbursed expenses on behalf of each of the above
referenced funds for fiscal 1999 amounted to $130,215.91, $184,884.78,
$117,925.96, $103,457.88, $120,519.72, $111,164.32, $129,279.79, $132,742.31 and
$35,469.97 representing 0.04%, 0.07%, 0.46%, 1.69%, 0.76%,0.75%, 2.37%, 5.88%
and 0.05 %, respectively, of each Fund's net assets.
The Distributor may pay broker-dealers and others, out of the fees it
receives under the Plans, quarterly trail commissions of up to 0.25%, on an
annual basis, of the average daily net assets attributable to the N class of
shares of each Fund held in the accounts of their customers.
Pursuant to the Plans, the Board of Directors of each Company will
review at least quarterly a written report of the distribution expenses incurred
on behalf of shares of the N Class of shares of the Funds by the Distributor.
The report will include an itemization of the distribution expenses and the
purposes of such expenditures. In addition, as long as the Plans remain in
effect, the selection and nomination of Directors of each Company who are not
"interested persons" of the Company within the meaning of the 1940 Act will be
committed to the Directors who are not interested persons of the Company.
THE ADMINISTRATOR
The administrator of the Capital Company, the Global Company (except
for the Emerging Markets Fund) and the Investment Company is State Street Bank
and Trust Company ("State Street"), 1776 Heritage Drive, North Quincy,
Massachusetts 02109.
Pursuant to an Administration Agreement with each Company, State Street
is responsible for performing all administrative services required for the daily
operation of the Companies, subject to the control, supervision and direction of
the Companies and the review and comment by each Company's auditors and legal
counsel. State Street has no supervisory responsibility over the investment
operations of the Funds. Administrative services performed by State Street
include, but are not limited to, the following: overseeing the determination and
publication of each Company's net asset value; overseeing the maintenance by
each Company's custodian of certain book and records of the Company; preparing
each Company's federal, state and local income tax returns; arrange for payment
of each Company's expenses; and preparing each financial information for each
Company's semi-annual and annual reports, proxy statements and other
communications.
For its services, State Street receives annual fees pursuant to the
following schedule:
<TABLE>
<CAPTION>
ANNUAL FEE
Average Assets Expressed in Basis Points: 1/100 of 1%
<S> <C>
Page 47
<PAGE>
<CAPTION>
ANNUAL FEE
Average Assets Expressed in Basis Points: 1/100 of 1%
<S> <C>
First $250 Million/Fund 2.50
Next $250 Million/Fund 1.75
Thereafter 1.00
Minimum/Fund $57,500
</TABLE>
Fees are calculated by multiplying each Average Asset Break Point in
the above schedule by the number of Funds in the Dresdner RCM complex to
determine the breakpoints used in the schedule. Total net assets of all the
Funds will be used to calculate the fee by multiplying the net assets of the
Funds by the basis point fees in the above schedule. The minimum fee will be
calculated by multiplying the minimum fee by the number of Funds in the complex
to arrive at the total minimum fee. The greater of the basis point fee or the
minimum fee will be allocated equally to each Fund in the complex.
Brown Brothers Harriman & Co. ("BBH") serves as administrator of the
Emerging Markets Fund. BBH provides administrative services similar to those
provided by State Street, as described above. For its services, which include
fund accounting services, BBH receives annual fees pursuant to the following
schedule:
<TABLE>
<CAPTION>
Average Assets ANNUAL FEE
Expressed in Basis Points: 1/100 of 1%
<S> <C>
First $100 Million 2.50
Next $400 Million 3.75
Thereafter 2.50
Minimum $70,000
</TABLE>
$1,500 per month for first additional class
Total net assets of the Fund will be used to calculate the fee by
multiplying the net assets of the Fund by the basis point fees in the above
schedule. The greater of the basis point fee or the minimum fee will be
allocated to the Fund.
OTHER SERVICE PROVIDERS
State Street acts as the transfer agent, redemption agent and dividend
paying agent for the Funds. State Street also acts as custodian for all the
Funds, except the Emerging Markets Fund. Brown Brothers Harriman & Co. ("Brown
Brothers") acts as custodian for the Emerging Markets Fund. Each custodian is
responsible for the safekeeping of a Fund's assets and the appointment of any
subcustodian banks and clearing agencies.
State Street's principal business address is 1776 Heritage Drive, North
Quincy, Massachusetts 02171. Brown Brothers' principal business address is 40
Water Street, Boston, Massachusetts 02109.
PricewaterhouseCoopers LLP ("PwC") acts as the independent public
accountants for the Funds. The accountant examines financial statements for the
Funds and provides other audit, tax, and related services. PwC's principal
business address is 160 Federal Street, Boston, Massachusetts 02110.
NET ASSET VALUE
For purposes of the computation of the net asset value of each share of
each Fund, equity securities traded on stock exchanges are valued at the last
sale price on the exchange or in the principal over-the-counter market in which
such securities are traded as of the close of regular trading on the day the
securities are being valued, unless the Board of Directors or a duly constituted
committee of the Board determines that such price does not reflect the fair
value of
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<PAGE>
the security. In cases where securities are traded on more than one exchange,
the securities are valued on the exchange determined by the Investment Manager
to be the primary market for the securities. If there has been no sale on such
day, the security will be valued at the closing bid price on such day. If no bid
price is quoted on such day, then the security will be valued by such method as
a duly constituted committee of the Board of Directors determines in good faith
to reflect its fair value. Readily marketable securities traded only in the
over-the-counter market that are not listed on the NASDAQ Stock Market or a
similar foreign reporting service will be valued at the mean bid price, or such
other comparable sources as the Board of Directors deems appropriate to reflect
their fair value. Other portfolio securities held by the Funds will be valued at
current market value, if current market quotations are readily available for
such securities. To the extent that market quotations are not readily available
such securities will be valued by whatever means a duly constituted committee of
the Board of Directors deems appropriate to reflect their fair value.
Futures contracts and related options are valued at their last sale or
settlement price as of the close of the exchange on which they are traded or, if
no sales are reported, at the mean between the last reported bid and asked
prices. All other assets of the Funds will be valued in such manner as a duly
constituted committee of the Board of Directors in good faith deems appropriate
to reflect their fair value.
Trading in securities on foreign exchanges and over-the-counter markets
is normally completed at times other than the close of regular trading on the
New York Stock Exchange. In addition, foreign securities and commodities trading
may not take place on all business days in New York, and may occur in various
foreign markets on days which are not business days in New York and on which net
asset value is not calculated. The calculation of net asset value may not take
place contemporaneously with the determination of the prices of portfolio
securities used in such calculation. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the close
of the New York Stock Exchange will not be reflected in the calculation of net
asset value unless the Board of Directors determines that a particular event
would materially affect net asset value, in which case an adjustment will be
made.
Assets or liabilities initially expressed in terms of foreign
currencies are translated prior to the next determination of net asset value
into U.S. dollars at the spot exchange rates at 12:00 p.m. Eastern time or at
such other rates as the Investment Manager may determine to be appropriate in
computing net asset value.
Debt obligations with maturities of 60 days or less are valued at
amortized cost. The Companies may use a pricing service approved by the Board of
Directors to value other debt obligations. Prices provided by such a service
represent evaluations of the mean between current bid and asked market prices,
may be determined without exclusive reliance on quoted prices, and may reflect
appropriate factors such as institution-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, individual
rating characteristics, indications of value from dealers, and other market
data. Such services may use electronic data processing techniques and/or a
matrix system to determine valuations. The procedures of such services are
reviewed periodically by the officers of the Investment Manager under the
general supervision of the Board of Directors. Short-term investments are
amortized to maturity based on their cost, adjusted for foreign exchange
translation, provided such valuations equal fair market value.
The Board of Directors of each Company has adopted guidelines and
procedures for valuing portfolio securities for which market quotations are not
readily available and has delegated to a Pricing Committee the responsibility
for determining the basis for pricing such securities. Such pricing may be used
only when no reliable external price is available from a pricing service, from a
dealer quotation, or from a recent sale.
PURCHASE AND REDEMPTION OF SHARES
The price paid for purchase and redemption of shares of the Funds is
based on the net asset value per share, which is normally calculated once daily
at the close of regular trading (normally 4:00 P.M. Eastern time) on the New
York Stock Exchange on each day that the New York Stock Exchange is open. The
New York Stock Exchange is currently closed on weekends and on the following
holidays: New Year's Day, President's Day, Martin Luther King Jr. Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas
Day. The offering price is effective
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<PAGE>
for orders received by Boston Financial Data Services ("BFDS") prior to the time
of determination of net asset value. Dealers are responsible for promptly
transmitting purchase orders to BFDS. Each Company reserves the right in its
sole discretion to suspend the continued offering of one or more of its Funds'
shares and to reject purchase orders in whole or in part when such rejection is
in the best interests of the Fund and its respective shareholders.
REDEMPTION OF SHARES
Payments will be made wholly in cash unless the Board of Directors
believes that economic conditions exist which would make such a practice
detrimental to the best interests of a Fund. Under such circumstances, payment
of the redemption price could be made either in cash or in portfolio securities
taken at their value used in determining the redemption price (and, to the
extent practicable, representing a pro rata portion of each of the portfolio
securities held by the Fund), or partly in cash and partly in portfolio
securities. Payment for shares redeemed also may be made wholly or partly in the
form of a pro rata portion of each of the portfolio securities held by a Fund at
the request of the redeeming stockholder, if the Company believes that honoring
such request is in the best interests of such series. If payment for shares
redeemed were to be made wholly or partly in portfolio securities, brokerage
costs would be incurred by the stockholder in converting the securities to cash.
Each Fund has authorized one or more brokers to accept on its behalf
purchase and redemption orders. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Customer orders will be priced at the Fund's Net Asset Value next
computed after they are accepted by an authorized broker or the broker's
authorized designee provided they are transmitted to the Fund's transfer agent
on the same day.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Each income dividend and capital gain distribution, if any, declared by
a Fund will be paid in full and fractional shares based on the net asset value
as determined on the ex-dividend date for such distribution, unless the
stockholder or his or her duly authorized agent has elected to receive all such
payments or the dividend or other distribution portion thereof in cash. Changes
in the manner in which dividend and other distribution payments are paid may be
requested by the stockholder or his or her duly authorized agent at any time
through written notice to the appropriate Company and will be effective as to
any subsequent payment if such notice is received by the Company prior to the
record date used for determining the stockholders entitled to such payment. Any
distribution election will remain in effect until the Company is notified by the
stockholder in writing to the contrary.
REGULATED INVESTMENT COMPANY
Each Fund has qualified and intends to continue to qualify for
treatment as a "regulated investment company" under Subchapter M of the Code.
Each Fund is treated as a separate corporation for tax purposes and thus the
provisions of the Code generally applicable to regulated investment companies
are applied separately to the Funds. In addition, net capital gains (the excess
of net long-term capital gain over net short-term capital loss), net investment
income, and operating expenses are determined separately for each Fund. By
complying with the applicable provisions of the Code, a Fund will not be subject
to federal income tax with respect to net investment income and net realized
capital gains distributed to its stockholders.
To qualify as a regulated investment company under Subchapter M,
generally a Fund must: (i) derive at least 90% of its gross income each taxable
year from dividends, interest, payments with respect to securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies and certain other income (including gains from certain options,
futures and forward contracts), ("Income Requirement"); and (ii) diversify its
holdings so that, at the end of each fiscal quarter, (a) at least 50% of the
value of the Fund's total assets is represented by cash, cash items, U.S.
Government securities, securities of other regulated investment companies and
other securities, limited, in
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<PAGE>
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (b) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
In any taxable year in which a Fund so qualifies and distributes at
least 90% of the sum of its investment company taxable income (consisting of net
investment income, the excess of net short-term capital gains over net long-term
capital losses and net gains from certain foreign currency transactions) and its
net tax-exempt interest income (if any) ("Distribution Requirement"), it will be
taxed only on that portion, if any, of such investment company taxable income
and any net capital gain that it retains. The Funds expect to so distribute all
of such income and gains on an annual basis and thus will generally avoid any
such taxation.
Even if a Fund qualifies as a "regulated investment company," it may be
subject to a federal excise tax unless it meets certain additional distribution
requirements. Under the Code, a nondeductible excise tax of 4% ("Excise Tax") is
imposed on the excess of a regulated investment company's "required
distribution" for a calendar year ending within the regulated investment
company's taxable year over the "distributed amount" for that calendar year. The
term "required distribution" means the sum of (i) 98% of ordinary income
(generally net investment income and net gains from certain foreign currency
transactions) for the calendar year, (ii) 98% of capital gain net income
(generally both long-term and short-term capital gain) for the one-year period
ending on October 31 (as though that period were the regulated investment
company's taxable year), and (iii) the sum of any untaxed, undistributed net
investment income and net capital gains of the regulated investment company for
prior periods. The term "distributed amount" generally means the sum of (i)
amounts actually distributed by a Fund from its current year's ordinary income
and capital gain net income and (ii) any amount on which a Fund pays income tax
for the year. The Funds intend to meet these distribution requirements to avoid
Excise Tax liability.
Stockholders who are subject to federal or state income or franchise
taxes will be required to pay taxes on dividend and capital gain distributions
they receive from a Fund whether paid in additional shares of the Fund or in
cash. To the extent that dividends received by a Fund would qualify for the 70%
dividends-received deduction available to corporations, the Fund must designate
in a written notice to stockholders, within 60 days after the close of the
Fund's taxable year, the amount of the Fund's dividends that would be eligible
for this treatment. In order to qualify for the dividends-received deduction
with respect to a dividend paid on Fund shares, a corporate stockholder must
hold the Fund shares for at least 45 days during the 90 day period that begins
45 days before the shares become ex-dividend with respect to the dividend.
Stockholders, such as qualified employee benefit plans, which are exempt from
federal and state taxation generally would not have to pay income tax on
dividend or capital gain distributions. Prospective tax-exempt investors should
consult their own tax advisers with respect to the tax consequences of an
investment in the Funds under federal, state, and local tax laws.
WITHHOLDING
Dividends paid by a Fund to a stockholder who, as to the U.S., is a
nonresident alien individual, nonresident alien fiduciary of a trust or estate,
foreign corporation, or foreign partnership (a "foreign stockholder") generally
will be subject to U.S. withholding tax (at a rate of 30% or a lower treaty
rate, if applicable). Withholding will not apply, however, if a dividend paid by
a Fund to a foreign stockholder is "effectively connected" with the conduct of a
U.S. trade or business, in which case the reporting and withholding requirements
applicable to U.S. citizens or domestic corporations will apply. Distributions
of net capital gain to foreign stockholders who are neither U.S. resident aliens
nor engaged in a U.S. trade or business generally are not subject to withholding
or U.S. federal income tax.
FOREIGN CURRENCY, OPTIONS, FUTURES AND FORWARD CONTRACTS
Gains from the sale or other disposition of foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and gains
from options, futures, and forward contracts derived by a Fund with respect
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<PAGE>
to its business of investing in securities of foreign currencies, will qualify
as permissible income under the Income Requirement.
SECTION 1256 CONTRACTS
Many of the options, futures contracts and forward contracts entered
into by the Funds are "Section 1256 contracts." Any gains or losses realized on
Section 1256 contracts are generally considered 60% long-term and 40% short-term
capital gains or losses, although certain foreign currency gains and losses from
such contracts may be treated as ordinary income in character. Section 1256
contracts held by a Fund at the end of each taxable year (and, for purposes of
the Excise Tax, on October 31 or such other dates as prescribed under the Code),
other than Section 1256 contracts that are part of a "mixed straddle" with
respect to which a Fund has made an election not to have the following rules
apply, must be "marked-to-market" (that is, treated as sold for their fair
market value) for federal income tax purposes, with the result that unrealized
gains or losses are treated as though they were realized. The 60% portion of
gains on Section 1256 contracts that is treated as long-term capital gain will
qualify for the reduced maximum tax rates on net capital gain -- 20% (10% for
taxpayers in the 15% marginal tax bracket) for gain recognized on capital assets
held for more than 12 months.
STRADDLE RULES
Generally, the hedging transactions and other transactions in options,
futures and forward contracts undertaken by the Funds may result in "straddles"
for U.S. federal income tax purposes. The straddle rules may affect the amount,
character and timing of recognition of gains or losses realized by a Fund. In
addition, losses realized by a Fund on positions that are part of a straddle
position may be deferred under the straddle rules, rather than being taken into
account for the taxable year in which these losses are realized. Because limited
regulations implementing the straddle rules have been promulgated, the tax
consequences of hedging transactions and options, futures and forward contracts
to the Funds are not entirely clear.
Hedging transactions may increase the amount of short-term capital gain
realized by a Fund, which is taxed as ordinary income when distributed to
stockholders. A Fund may make one or more elections available under the Code
which are applicable to straddle positions. If a Fund makes any of the
elections, the amount, character and timing of the recognition of gains or
losses from the affected straddle positions will be determined under rules that
vary according to elections made. The rules applicable under certain elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions. Because the application of the straddle rules may affect the
character of gains or losses, defer losses and/or accelerate the recognition of
gains or losses from the affected straddle positions, the amount which must be
distributed to stockholders, and which will be taxed to stockholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not engage in such hedging transactions.
SECTION 988 GAINS AND LOSSES
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues interest or other
receivables, or accrues expenses or other liabilities, denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities, generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in foreign currency and on the
disposition of certain futures contracts, forward contracts and options, gains
or losses attributable to fluctuation in the value of foreign currency between
the date of acquisition of the debt security, contract or option and the date of
disposition thereof are also treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Fund's investment company taxable income to
be distributed to stockholders as ordinary income.
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FOREIGN TAXES
A Fund may be required to pay withholding and other taxes imposed by
foreign countries which would reduce the Fund's investment income, generally at
rates from 10% to 40%. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. If more than 50% of the value of a
Fund's total assets at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible to elect to "pass-through" to
the Fund's stockholders the amount of foreign income and similar taxes paid by
the Fund. If this election is made, stockholders generally subject to tax will
be required to include in gross income (in addition to taxable dividends
actually received) their pro rata shares of the foreign income taxes paid by the
Fund, and may be entitled either to deduct (as an itemized deduction) their pro
rata shares of foreign taxes in computing their taxable income or to use such
amount (subject to limitations) as a foreign tax credit against their U.S.
federal income tax liability. No deduction for foreign taxes may be claimed by a
stockholder who does not itemize deductions. Each stockholder will be notified
within 60 days after the close of a Fund's taxable year whether the foreign
taxes paid by the Fund will be "passed-through" for that year.
The foregoing is a general abbreviated summary of present U.S. federal
income tax laws applicable to the Funds, their stockholders and dividend and
capital gain distributions by the Funds. Stockholders are urged to consult their
own tax advisers for more detailed information and for information regarding any
foreign, state, and local tax laws and regulations applicable to dividends and
other distributions received from the Funds.
INVESTMENT RESULTS
Average annual total return ("T") of a Fund is calculated as follows:
an initial hypothetical investment of $1,000 ("P") is divided by the net asset
value of shares of the Fund as of the first day of the period in order to
determine the initial number of shares purchased. Subsequent dividend and
capital gain distributions by a Fund are paid at net asset value on the payment
date determined by the Board of Directors. The sum of the initial shares
purchased and shares acquired through distributions is multiplied by the net
asset value per share of the Fund as of the end of the period ("n") to determine
ending redeemable value ("ERV"). The ending value divided by the initial
investment converted to a percentage equals total return. The formula thus used,
as required by the SEC, is:
n
P(1+T) = ERV
The resulting percentage indicates the positive or negative investment
results that an investor would have experienced from reinvested dividend and
capital gain distributions and changes in share price during the period.
This formula reflects the following assumptions: (i) all share sales at
net asset value, without a sales load reduction from the $1,000 initial
investment; (ii) reinvestment of dividends and distributions at net asset value
on the reinvestment date determined by the Board of Directors; and (iii)
complete redemption at the end of any period illustrated. Total return may be
calculated for one year, five years, ten years, and for other periods, and will
typically be updated on a quarterly basis. The average annual compound rate of
return over various periods may also be computed by using ending values as
determined above.
Quotations of the Balanced Fund's yield are based on the investment
income per share earned during a particular 30-day period (including dividends,
if any, and interest), less expenses accrued during the period ("net investment
income"), and are computed by dividing net investment income by the net asset
value per share on the last day of the period, according to the following SEC
formula:
6
YIELD = 2[(a - b + 1) - 1]
-----
cd
Where a = dividend and interest income during the period
b = expenses accrued during the period (net of reimbursements)
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c = average daily number of shares outstanding during the period that
were entitled to receive dividends
d = maximum net offering price per share on the last day of the period
In addition, in order to more completely represent a Fund's performance
or more accurately compare such performance to other measures of investment
return, a Fund also may include in advertisements and stockholder reports other
total return performance data based on time-weighted, monthly-linked total
returns computed on the percentage change of the month end net asset value of
the Fund after allowing for the effect of any cash additions and withdrawals
recorded during the month. Returns may be quoted for the same or different
periods as those for which average total return is quoted. A Fund's investment
results will vary from time to time depending upon market conditions, the
composition of the Fund's portfolio, and operating expenses, so that any
investment results reported should not be considered representative of what an
investment in the Fund may earn in any future period. These factors and possible
differences in calculation methods should be considered when comparing a Fund's
investment results with those published for other investment companies, other
investment vehicles and unmanaged indices. Results also should be considered
relative to the risks associated with a Fund's investment objective and
policies.
Each of the Funds may from time to time compare its investment results
with data and mutual fund rankings published or prepared by Lipper Inc. and
Morningstar, Inc., which rank mutual funds by overall performance, investment
objectives, and assets.
In addition, the Funds may from time to time compare their performance
with one or more of the following:
1. THE S&P 500 INDEX which is a capitalization-weighted index of
500 stocks that attempts to measure performance of the broad
domestic economy through changes in the aggregate market value
of 500 stocks representing major industries.
2. THE SALOMON BROTHERS EXTENDED MARKET INDEX ("EMI"), which is a
component of the Salomon Brothers Broad Market Index ("BMI")
which includes listed shares of 5,409 companies with a total
available market capitalization of at least the local
equivalent of US$100 million on the last business day of May
each year. The BMI consists of two components: the Primary
Market Index ("PMI") is the large capitalization stock
component and the EMI is the small capitalization stock
component. The PMI universe is defined as those stock falling
within the top 80% of the cumulative available capital level
in each country. The EMI includes the bottom 20% of the
cumulative available capital level in each country.
3. THE RUSSELL MIDCAP INDEX , which is composed of the smallest
800 companies in the Russell 1000 Index. The Russell 1000
Index is made up of the 1,000 largest companies in the Russell
3000 Index, which is composed of the 3,000 largest U.S.
companies by market capitalization and represents
approximately 98% of the investable U.S. equity market.
4. THE RUSSELL MIDCAP GROWTH INDEX, which measures the
performance of those Russell Midcap companies with higher
price-to-book ratios and higher forecasted growth values. The
stocks are also members of the Russell 1000 Growth index.
5. THE LIPPER SCIENCE & TECHNOLOGY FUND INDEX, which is an
equally weighted index of the 10 largest U.S. science and
technology mutual funds.
6. THE RUSSELL MIDCAP HEALTH CARE INDEX, which is composed of all
medium and medium/small health care companies in the Russell
1000 Index. The Russell 1000 Index measures the performance of
the 1,000 largest companies in the Russell 3000 Index, which
represents approximately 90% of the total market
capitalization of the Russell 3000 Index.
7. THE AMERICAN STOCK EXCHANGE BIOTECHNOLOGY INDEX, which is an
equal-dollar weighted index that attempts to measure the
performance of a cross section of companies in the
biotechnology
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industry that are primarily involved in the use of biological
processes to develop products or provide services. This index
was developed with a base level of 200 stocks as of October
18, 1991.
8. THE NASDAQ BIOTECHNOLOGY INDEX, which is a
capitalization-weighted index that attempts to measure the
performance of all NASDAQ stocks in the biotechnology sector.
This index was developed with a base value of 200 stocks as of
November 1, 1993.
9. THE RUSSELL 2000 INDEX, which is composed of the 2,000
smallest securities in the Russell 3000 Index, which is
composed of the 3,000 largest U.S. companies based on market
capitalization and represents approximately 98% of the
investable U.S. equity market.
10. THE MSCI EMERGING MARKETS FREE INDEX, which is a market
capitalization-weighted index composed of 981 companies in 26
emerging market countries. The average market capitalization
size of the listed companies is US$800 million.
11. THE IFC INDEX OF INVESTABLE EMERGING MARKETS, which represents
the IFC investable regional total return composite. The term
"investable" indicates that the stocks and the weights in the
IFCI index represent the amount that the foreign institutional
investors might buy by the virtue of the foreign institutional
restrictions (either at the national level or by the
individual company's corporate statute) plus factoring in
minimum market capitalization and liquidity screens.
12. THE MSCI-EAFE INDEX, which is an arithmetic, market
value-weighted average of the performance of over 900
securities listed on the stock exchanges of the countries in
Europe, Australasia, and the Far East. The index is calculated
on a total return basis, which includes reinvestment of gross
dividends before deduction of withholding taxes.
13. THE MSCI-ACWI EX-U.S. INDEX, which is a market
capitalization-weighted index composed of companies
representative of the market structure of 47 developed and
emerging market countries excluding the United States. Stock
selection excludes securities which are not purchasable by
foreigners. The index is calculated on a total return basis,
which includes reinvestment of gross dividends before
deduction of withholding taxes.
14. THE MSCI WORLD SMALL CAP INDEX, which is a market
capitalization weighted index composed of companies
representative of the market structure of 22 developed market
countries in North America, Europe, and the Asia/Pacific
region. The Index is created by selecting companies within the
market capitalization range of US $200 - $800 million. The
Index aims to represent 40% of the small cap universe within
each country by capturing 40% of each industry.
15. THE DAX 100 INDEX, an unmanaged index which is commonly used
as a performance comparison for funds that invest primarily in
Germany and which measures the total rate of return of the 100
most highly capitalized stocks traded on the Frankfurt Stock
Exchange.
16. THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE INDEX, which
measures the total rate of return of nearly 600 stocks from 15
developed European countries.
17. THE LEHMAN BROTHERS AGGREGATE BOND INDEX which is a market
value weighted performance benchmark for investment-grade
fixed-rate debt issues, including government, corporate,
asset-backed, and mortgage-backed securities, with maturities
of at least one year.
18. THE LIPPER BALANCED INDEX, which is a composite prepared by
Lipper Inc. of mutual funds with the same objective as the
Balanced Fund.
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19. THE BLENDED S&P 500 INDEX/LEHMAN BROTHERS AGGREGATE BOND
INDEX, which is a blended index comprised of the performance
of the two indexes weighted 60% Standard & Poor's 500 Index
and 40% Lehman Brothers Aggregate Bond Index.
GENERAL INFORMATION
The Global Company and the Capital Company were incorporated in
Maryland as open-end management investment companies on September 17, 1995 and
March 16, 1979, respectively.
The authorized capital stock of the Capital Company is 1,000,000,000
shares of capital stock (par value $.0001 per share), of which 100,000,000
shares have been designated as shares of the International Fund. The authorized
capital stock of the Global Company is 1,000,000,000 shares of capital stock
(par value $.0001 per share), of which 50,000,000 shares have been designated as
shares of each of the Global Technology Fund, Global Small Cap Fund, Global
Health Care Fund, Large Cap Fund, Biotechnology Fund, Emerging Markets Fund and
the Tax Managed Growth Fund and 25,000,000 shares of capital stock (par value
$.0001 per share) have been designated as shares of the Balanced Fund. The Board
of Directors of each Company may, in the future, authorize the issuance of other
classes of shares of such Funds, or of other series of capital stock
representing shares of additional investment portfolios or funds.
The Investment Company was organized as a closed-end management
investment company incorporated under the laws of the State of Maryland on
February 2, 1990. On December 4, 1998, the Board of Directors, including the
Directors who are not interested persons of the Investment Company (as defined
in the 1940 Act), approved the final plan for the conversion of the Fund to an
open-end investment company. At the Company's Annual Meeting on January 26,
1999, the Company's stockholders approved, among other things, (a) changing the
Fund's investment strategy from a predominately German investment portfolio to a
broader European investment portfolio, (b) changing the Fund's name to Dresdner
RCM Europe Fund, (c) changing the Fund from a closed-end investment company to
an open-end investment company, (d) modifying and eliminating certain
fundamental investment restrictions of the Fund, (e) the Investment Management
Agreement between the Fund and the Investment Manager, and (f) the Rule 12b-1
Distribution Plan of the Fund. The Fund converted to an open-end investment
company on May 3, 1999. The Board of Directors of the Investment Company has
authority to issue an unlimited number of shares of separate series and classes.
The Europe Fund is currently the only series of the Company. Upon conversion to
an open-end fund, the Fund commenced offering two classes of stock: Class N and
Class I, as described in the Prospectus. Outstanding shares of the Fund on the
date of conversion were automatically redesignated Class N shares.
DESCRIPTION OF CAPITAL SHARES
All shares of each Company have equal voting rights and will be voted
in the aggregate, and not by series, except where voting by series is required
by law or where the matter involved affects only one series. There are no
conversion or preemptive rights in connection with any shares. All shares of the
Funds when duly issued will be fully paid and non-assessable. The rights of the
holders of shares of each Fund may not be modified except by vote of the
majority of the outstanding shares of such Fund. Certificates are not issued
unless requested and are never issued for fractional shares. Fractional shares
are liquidated when an account is closed.
Shares of each Company have non-cumulative voting rights, which means
that the holders of more than 50% of all series of a Company's shares voting for
the election of the directors can elect 100% of the directors of the Company if
they wish to do so. In such event, the holders of the remaining less than 50% of
the shares of the Company voting for the election of directors will not be able
to elect any person to the Board of Directors of the Company.
None of the Companies are required to hold a meeting of stockholders in
any year in which the 1940 Act does not require a stockholder vote on a
particular matter, such as election of directors. A Company will hold a meeting
of its stockholders for the purpose of voting on the question of removal of one
or more directors if requested in writing by the
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holders of at least 10% of the Company's outstanding voting securities, and will
assist in communicating with its stockholders as required by Section 16(c) of
the 1940 Act.
Because the Capital Company, Global Company and Investment Company are
registered separately under the 1940 Act but are using a combined Prospectus and
SAI there is a possibility that the series of any Company may be liable for any
misstatements, inaccuracies or incomplete disclosures in such documents
concerning any other Company.
Stockholders are entitled to one vote for each full share held and
fractional votes for fractional shares held. Unless otherwise provided by law or
its Articles of Incorporation or Bylaws, each Company generally may take or
authorize any extraordinary action upon the favorable vote of the holders of
more than 50% of the outstanding shares of the Company or may take or authorize
any routine action upon approval of a majority of the votes cast.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Companies shall not be deemed to have been effectively acted
upon unless approved by a majority of the outstanding voting securities, as
defined in the 1940 Act, of the series or class of the Company affected by the
matter. Under Rule 18f-2, a series or class is presumed to be affected by a
matter, unless the interests of each series or class in the matter are identical
or the matter does not affect any interest of such series or class. Under Rule
18f-2 the approval of an investment advisory agreement or any change in a
fundamental investment policy would be effectively acted upon with respect to a
Fund only if approved by a majority of its outstanding voting securities, as
defined in the 1940 Act. However, the rule also provides that the ratification
of independent public accountants, the approval of principal underwriting
contracts and the election of directors may be effectively acted upon by the
stockholders of the Company voting without regard to Fund.
Each share of each Class of a Fund (Class N - Non-Institutional and
Class I - Institutional) represents an equal proportional interest in the Fund
with each other share of the same Class and is entitled to such dividends and
distributions out of the income earned on the assets allocable to the Class as
are declared in the discretion of the Board of Directors. In the event of the
liquidation or dissolution of either Company, stockholders of a Fund are
entitled to receive the assets attributable to the Fund that are available for
distribution, and a distribution of any general assets not attributable to a
particular Fund that are available for distribution, in such manner and on such
general basis as the Board of Directors may determine.
ADDITIONAL INFORMATION
COUNSEL
Certain legal matters in connection with the capital shares offered by
the Capital Company and Global Company have been passed upon by Paul, Hastings,
Janofsky & Walker LLP, 555 South Flower Street, Los Angeles, California 90071.
The validity of the capital stock offered by the Global Company and the Capital
Company has been passed upon by Venable, Baetjer and Howard, LLP, 1800
Mercantile Bank & Trust Building, 2 Hopkins Plaza, Baltimore, Maryland 21201.
Certain legal matters in connection with the capital shares offered by the
Investment Company have been passed upon for the Fund by Shaw Pittman, 2300 N
Street N.W. Washington, DC 20037. The validity of the capital stock by the
Investment Company has been passed upon by Kirkpatrick & Lockhart LLP, 1800
Massachusetts Avenue, N.W., Washington, DC 20036. Paul, Hastings, Janofsky &
Walker LLP has acted and will continue to act as counsel to the Investment
Manager in various matters.
LICENSE AGREEMENT
Under License Agreements dated as of December 11, 1997, the Investment
Manager has granted each Company the right to use the "Dresdner RCM" name and
has reserved the right to withdraw its consent to the use of such name by the
Company at any time, or to grant the use of such name to any other company. In
addition, each
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Company has granted the Investment Manager, under certain conditions, the right
to use any other name it might assume in the future, with respect to any other
investment company sponsored by the Investment Manager.
FINANCIAL STATEMENTS
Incorporated by reference herein are the financial statements of the
Funds contained in the Funds' Annual Report to Shareholders for the year ended
December 31, 1999, including the Report of Independent Accountants, dated
February 18, 2000, the Statements of Assets and Liabilities, including the
Portfolio of Investments and the related Statements of Operations and Changes in
Net Assets, and the Financial Highlights. Copies of the Funds' Annual and
Semi-Annual Reports to Shareholders will be available, upon request, by calling
(800) 726-7240, or by writing to Four Embarcadero Center, San Francisco,
California 94111.
REGISTRATION STATEMENT
The Funds' Prospectus and this SAI do not contain all of the
information set forth in each Company's registration statement and related forms
as filed with the SEC, certain portions of which are omitted in accordance with
rules and regulations of the SEC. The registration statement and related forms
may be inspected at the Public Reference Room of the SEC at Room 1024, 450 5th
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies thereof may be
obtained from the SEC at prescribed rates. It is also available on the SEC's
Internet Web site at http://www.sec.gov/. Statements contained in the Prospectus
or this SAI as to the contents of any contract or other document referred to
herein or in the Prospectus are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to each Company's registration statement, each such statement being
qualified in all respects by such reference.
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